Head-to-head
CAC vs LTV
Customer acquisition cost is the price of winning one customer: total sales and marketing spend divided by the number of customers it produced. Lifetime value is the profit that customer generates before they leave. On their own neither number means much, because a high CAC is fine against a high LTV and disastrous against a low one.
The comparison is the point, and it is almost always expressed as a ratio. A business that spends $320 to win a customer worth $1,500 is running at 4.7 to 1, which is healthy. The same $320 against a customer worth $400 is underwater before a single cost of serving them is counted.
The most common error is computing LTV on revenue rather than on contribution. Revenue includes the cost of delivering the product, so an LTV built from gross revenue overstates what the customer is worth by the whole cost of goods. Multiplying revenue by gross margin first is what makes the two sides comparable with CAC, which is a cash cost.
The second error is treating churn as fixed. Lifetime is the reciprocal of churn, so halving churn doubles LTV while halving acquisition cost only improves CAC by the amount actually saved. Retention work usually moves the ratio further per dollar than acquisition work does, and this is visible directly in the arithmetic.
CAC
How To Calculate Customer Acquisition Cost
Customer acquisition cost divides everything you spent to win demand by the number of customers who actually paid. The arithmetic is trivial; the judgement sits in deciding which costs belong in the numerator and which signups belong in the denominator.
LTV
How To Calculate Customer Lifetime Value
Customer lifetime value estimates how much contribution one customer leaves behind over their whole relationship, not just in the first month. With 50 of monthly revenue, a 70 per cent gross margin and 4 per cent monthly churn, that comes to 875.0.
How They Differ
| Attribute | CAC | LTV |
|---|---|---|
| What it measures | Cost of winning one customer | Profit from one customer before they leave |
| Direction on the P&L | A cost, incurred up front | Revenue net of variable cost, earned over time |
| Typical formula | Total spend ÷ new customers | Monthly contribution ÷ monthly churn |
| Time frame | A single period — usually a quarter | The whole relationship, in months |
| Sensitivity to churn | None — churn does not enter the calculation | Entirely; lifetime is 1 ÷ churn |
| Healthy benchmark | Recovered within 12 months | At least three times CAC |
| Where it is used in this library | Pricing a channel or a campaign | Deciding how much retention is worth |
The Same Numbers, Both Ways
$80,000 of sales and marketing spend winning 250 customers, at $80 a month and 75% gross margin with 4% monthly churn.
- Total spend
- $80,000
- New customers
- 250
- Revenue per customer
- $80 a month
- Gross margin
- 75%
- Monthly churn
- 4%
| Line | CAC | LTV |
|---|---|---|
| Headline figure | $320.00 | $1,500.00 |
| Time horizon | One quarter of spend | The whole relationship |
| At 4% monthly churn | $320.00 | $1,500.00 |
| At 8% monthly churn | $320.00 | $750.00 |
| At 2% monthly churn | $320.00 | $3,000.00 |
| Payback | 5.3 months to recover CAC | 25 months of contribution |
A CAC of $320.00 against an LTV of $1,500.00 is a 4.7 to 1 ratio, and the acquisition cost is recovered in 5.3 months of a 25 month relationship. Doubling churn to 8% halves LTV to $750.00 and the ratio to 2.3 to 1, which is the figure that decides whether the spend is worth repeating.
When To Use Each
CAC
- You are deciding whether a channel or campaign is worth continuing.
- You are comparing two acquisition routes with very different conversion rates.
- You need the payback period in months, which is CAC divided by monthly contribution.
LTV
- You are deciding how much to spend on retention or onboarding.
- You are valuing the business, or a cohort, for a forecast or a raise.
- You are segmenting customers and need to know which cohort is worth acquiring.
Common Questions
What is a good LTV to CAC ratio?
Three to one is the usual floor, and above five to one often means under-investing in growth rather than running efficiently. Below one means each customer destroys value, and between one and three the business only works if fixed costs are very low.
Why use contribution rather than revenue for LTV?
Because CAC is a cash cost and revenue is not cash — it still carries the cost of delivering the product. Multiplying revenue by gross margin gives the part of it that is actually available to pay back the acquisition spend.
How long should CAC payback take?
Under twelve months is the common benchmark for a subscription business, and under six is strong. Payback longer than the expected lifetime means the spend is never recovered, regardless of what the ratio looks like on paper.
Should CAC include salaries?
Yes, for sales and marketing staff whose job is winning customers. Excluding them is the single most common way CAC is understated, and it makes the ratio look better than the cash flow supports.
What if churn is not constant?
Then a single reciprocal overstates or understates lifetime. Real cohorts usually churn fastest early and flatten later, so a blended rate understates LTV for customers who survive the first months. Cohort curves are the honest way to do it.
More Comparisons
- Contribution Margin vs Gross Margin
Gross margin deducts cost of goods sold; contribution margin deducts every variable cost. On $500,000 of revenue with $200,000 of COGS and $75,000 of variable selling costs, gross margin is 60% and contribution margin is 45%.
- ROI vs CAGR
ROI measures the whole return; CAGR turns it into a compound annual rate. A 100% return over five years is 20% a year by division but 14.87% a year in reality.
Sources
- Customer acquisition cost and lifetime value — unit economics — Corporate Finance Institute
- Customer lifetime value — definition and formulas — Investopedia
- Churn and retention measurement guidance — U.S. Small Business Administration
Both methods sit in Business.