How do customer acquisition cost, lifetime value and payback relate?

CAC measures acquisition spending per new customer, while LTV estimates gross profit produced across the customer relationship. Their ratio and payback period connect growth spending with unit economics.

CAC, gross-profit LTV and payback

CAC = Marketing spend ÷ New customersAnnual profit = Order value × Orders per year × Gross margin%LTV = Annual profit × Lifespan in yearsPayback = CAC ÷ Annual profit × 12

One cohort’s unit economics

The default figures calculate acquisition cost from spend and customers, then use revenue, margin and lifetime assumptions to estimate value and recovery time.

Illustrative inputs; currency amounts below use USD. Rates and prices are assumptions, not live quotes.

Marketing spend
$20,000.00
New customers acquired
250
Average order value
$65.00
Orders per customer per year
4
Average customer lifespan (years)
3
Gross margin
60%

Step-by-step calculation

  1. Acquisition cost = 20,000 ÷ 250 = 80 per new customer.
  2. Annual gross profit per customer = 65 × 4 × 60 ÷ 100 = 156. Multiply by 3 years for LTV 468.
  3. LTV/CAC = 468 ÷ 80 = 5.85. Payback = CAC ÷ annual gross profit × 12 = 6.153846 months.

Intermediate figures are rounded for reading. Results use the full calculation precision.

LTV to CAC5.85:1
Lifetime value$468.00
Cost to acquire$80.00
Payback period (months)6.15

Ratio quality versus cash recovery time

LTV-to-CAC compares value with acquisition cost; payback estimates how long contribution takes to recover CAC. A strong-looking ratio can still hide a payback period that strains cash.

Cohort and gross-margin consistency

Using revenue instead of gross profit inflates LTV. Churn, margin and lifetime must also be defined consistently for the same customer cohort.

  • Acquisition spend and acquired customers belong to the same cohort.
  • Average revenue, margin and lifetime remain stable in the estimate.
  • Discount rates, expansion revenue and support-cost changes are excluded.

Calculations related to cac and ltv

The following tools examine neighbouring parts of the same calculation without changing the inputs or assumptions used above.

References

Sources and conventions

  • BDC: customer acquisition cost

    Our simplified CAC includes the marketing spend you enter; full business acquisition costs can include additional sales and staffing costs.

Quick answers

Frequently asked questions

Should LTV use revenue or gross profit?

This calculator applies the entered gross margin to customer revenue before calculating LTV.

How is CAC payback period calculated?

CAC is divided by annual profit per customer and multiplied by 12.

Does LTV include customer retention changes or discounting?

No. Order frequency, margin and lifespan are treated as constant, with no discounted cash-flow adjustment.

Calculation method and limitations · Report an error

Educational content only. This guide is not financial advice.