Customer acquisition cost and lifetime value: the two numbers behind your marketing budget
What customer acquisition cost and lifetime value mean, how to calculate both, what a good ratio looks like, and a calculator with worked examples.
Customer acquisition cost (CAC) is your sales and marketing costs for a period divided by the new customers you won in it. Lifetime value (LTV) is what a customer is worth over the whole time they buy from you: average sale times purchases a year times years as a customer, times your gross margin. Divide LTV by CAC. Shopify describes 3:1 to 5:1 as efficient. Also check the payback period: how many months of profit it takes to earn back what you spent to win the customer.
- CAC is sales and marketing costs divided by new customers in the same period.
- Lifetime value is average sale × purchases a year × years as a customer × gross margin.
- Count every acquisition cost, including your own time, and only first-time customers.
- Shopify describes an LTV to CAC ratio of 3:1 to 5:1 as efficient.
- The payback period shows how long your cash is tied up in each new customer.
- Raising lifetime value is usually easier than cutting acquisition cost.
Key terms explained (12)
- Customer acquisition cost (CAC)
- The average amount you spend on sales and marketing to win one new customer.
- Customer lifetime value (LTV or CLV)
- What a customer is worth to you over the whole time they buy from you.
- LTV to CAC ratio
- Lifetime value divided by acquisition cost. It shows how many dollars of value you get for each dollar spent winning customers.
- Gross margin
- The share of a sale left after the direct cost of delivering it, such as materials, stock or the wages for doing the job.
- Average order value
- The average amount a customer spends each time they buy.
- Purchase frequency
- How many times a typical customer buys in a set period, such as a year.
- Customer lifespan
- How long a typical customer keeps buying from you.
- Churn rate
- The share of customers who stop buying or cancel in a period, such as a month.
- Payback period
- How long it takes for a customer’s gross profit to cover what you spent to win them.
- SaaS
- Software as a service. Software you pay for by subscription.
- CRM
- Customer relationship management system. Software that stores your customers and what they have bought.
- UTM
- Short tags added to a link so your analytics can tell which campaign or channel a visitor came from.
Two questions sit under every marketing budget. How much does it cost to win a new customer? And how much is that customer worth? If you know both numbers, you can decide how much to spend, which channels to keep and when to push harder. If you do not, every budget is a guess.
The first number is customer acquisition cost, or CAC. The second is customer lifetime value, usually shortened to LTV or CLV. This playbook explains both in plain words, shows how to calculate them with worked examples for three kinds of business, and gives you a calculator to run your own.
What CAC and lifetime value mean
Customer acquisition cost (CAC) is what you spend, on average, to win one new customer. Shopify describes the calculation simply: add up your acquisition costs for a period, then divide by the number of first-time customers in that period. Its example is $500 of marketing spend and 10 new customers, which gives a CAC of $50.
Customer lifetime value (LTV) is what a customer is worth to you over the whole time they buy from you. Shopify’s lifetime value guide gives the basic formula as average order value times purchase frequency times average customer lifespan, and suggests multiplying by gross margin to see profit rather than revenue.
Why use margin? Because the money you spend on marketing has to come out of profit, not sales. If a customer spends $1,000 but the job costs you $600 to deliver, that customer is worth $400 to you before marketing.
What to count as acquisition cost
Most people undercount CAC by including only ad spend. Shopify’s list of costs to include is a good checklist:
- Advertising: search, social and traditional media.
- Marketing tools and software, such as a CRM (customer relationship management system), analytics and email.
- Marketing and sales staff, including freelancers and contractors.
- Discounts and offers used to win new customers.
- Content creation: photos, videos, articles and graphics.
- Sales costs that support the marketing.
If you do the marketing yourself, put a value on your time. Five hours a week at $50 an hour is $1,000 a month, and leaving it out makes your marketing look cheaper than it is.
Two more rules keep the number honest. Count only first-time customers, not repeat ones. And use a period long enough to smooth out bumps: three or six months is better than one.
Worked examples for three businesses
These are illustrations with round numbers, not benchmarks. They show how differently the same maths plays out.
| Home cleaning | Gift shop | Software (SaaS) | |
|---|---|---|---|
| Costs for the period | $3,000 | $1,200 | $10,000 |
| New customers | 20 | 60 | 25 |
| CAC | $150 | $20 | $400 |
| Average sale | $160 a visit | $45 a visit | $49 a month |
| How often they buy | 6 times a year | 2 times a year | every month |
| How long they stay | 2 years | 3 years | about 33 months (3% leave each month) |
| Gross margin | 40% | 50% | 80% |
| Lifetime value (gross profit) | $768 | $135 | about $1,307 |
| LTV to CAC ratio | 5.1 : 1 | 6.8 : 1 | 3.3 : 1 |
| Months to earn back the CAC | about 4.7 | about 5.3 | about 10.2 |
For the software example, lifetime value uses the subscription formula in Shopify’s guide: monthly revenue per customer times gross margin, divided by the share of customers who leave each month. A 3% monthly churn rate gives an average lifetime of about 33 months, the same example David Skok uses.
Notice the gift shop. Its customers are worth only $135 each, yet it has the best ratio, because it wins them cheaply. The software company has the most valuable customers and the thinnest ratio, because each one costs $400 to win. You cannot judge either number on its own.
Calculate yours
CAC and lifetime value calculator
Use your own numbers from the last three or six months.
Gross margin is what is left of each sale after the direct cost of delivering it, such as materials, product cost or the wages for doing the job. The starting numbers are the home cleaning example, not benchmarks.
The last figure, months to earn back the CAC, is called the payback period. It matters for cash flow. A business with a great ratio but a 24-month payback can still run short of money, because it pays for each customer up front and gets the money back slowly.
What is a good ratio?
The ratio compares the two numbers: lifetime value divided by acquisition cost.
Shopify's guidance is that "if your ratio falls between 3:1 to 5:1, your acquisition strategy is working efficiently". It adds that a much higher ratio may mean you are under-investing in growth, and a lower one means it is time to raise lifetime value or lower acquisition cost.
For software companies, David Skok gives a similar guideline: the ratio "should be higher than 3". He notes that this assumes a simple lifetime value formula and a gross margin of 80% or more. On payback, he describes the older target of under 12 months as a guideline from 2011, says longer periods are now often accepted, and notes that payback under 12 months is rare in practice.
Treat all of these as reference points, not rules. A new business spending to get known will run a lower ratio for a while. What matters is the direction: is the ratio improving month by month?
What to fix first
There are only two ways to improve the ratio: lower what you spend to win a customer, or raise what each customer is worth. The second is usually easier and cheaper.
| If this is the problem | Try this first | Playbook that helps |
|---|---|---|
| Customers buy once and never again | A follow-up plan: thank you, review request, reminder for the next service | CRM automations |
| Leads come in but few become customers | Reply faster and follow up every quote | Sales pipeline |
| One channel costs far more than the others | Work out CAC for each channel separately, then move budget | Choosing marketing channels |
| Average sale is low | A bundle, an upgrade or a maintenance plan | Offers that do not cut your price |
| Software users leave in the first months | Better onboarding and a clear first win | SaaS trial-to-paid emails |
Working out CAC by channel needs to know where each customer came from. If you are not tracking that yet, the GA4 setup guide and the UTM link builder in the marketing report playbook are the place to start.
Your first calculation
Tick these off as you work through it. Your progress is saved in this browser.
- Chose a period: the last full three or six months.
- Added up every acquisition cost, including your own time.
- Counted first-time customers only.
- Worked out the average sale and how often customers buy.
- Estimated how long a typical customer stays, from your own records.
- Used gross margin, not revenue, for lifetime value.
- Calculated the ratio and the payback period.
- Wrote down the numbers so you can compare them next quarter.
If you spend on paid ads, the Meta ads budget playbook shows how to set a daily budget from the cost per lead you can afford.
Tools for the job
| Tool | Use it for | Cost |
|---|---|---|
| Google Sheets | A simple quarterly CAC and LTV sheet | Free |
| Google Analytics | Seeing which channels bring new customers to your site | Free |
| QuickBooks | Pulling marketing costs and gross margin from your accounts | Paid plans |
| HubSpot CRM | Recording where each customer came from and what they spend | Free and paid plans |
| ChartMogul | Lifetime value and churn for subscription businesses | Free and paid plans |
Plans and pricing change. Check each tool's site for current details.
Frequently asked questions
What is customer acquisition cost?
It is the average amount you spend on sales and marketing to win one new customer. Add up your acquisition costs for a period and divide by the number of first-time customers in that period.
How do I calculate customer lifetime value?
Multiply your average sale by how many times a customer buys in a year and by how many years they stay. Then multiply by your gross margin to see profit rather than revenue. Shopify gives this formula in its lifetime value guide.
What is a good LTV to CAC ratio?
Shopify describes a ratio between 3:1 and 5:1 as efficient. For software companies, David Skok suggests above 3:1, assuming a high gross margin. Treat these as reference points and watch whether your own ratio improves over time.
Should I include my own time in CAC?
Yes. If you spend hours each week on marketing, put a fair hourly value on that time and include it. Leaving it out makes your marketing look cheaper than it is.
What is a CAC payback period?
It is how many months of gross profit from a customer it takes to earn back what you spent to win them. A shorter payback means your cash comes back sooner.
How do I lower my CAC?
Find out which channels bring customers most cheaply and move budget toward them, reply to leads faster, and follow up every quote. Raising lifetime value with repeat purchases and referrals often improves the ratio faster.
Related playbooks
Browse every playbook on reporting and analytics, or see all marketing playbooks.
Sources
- Customer acquisition cost (CAC): calculate and reduce itShopify · July 29, 2024
- Customer lifetime value: how to calculate CLVShopify · October 8, 2026
- SaaS Metrics 2.0: detailed definitionsFor Entrepreneurs · David Skok · updated December 21, 2020
Remar Catapang is a full-funnel marketing strategist based in Ontario, Canada. He has worked in marketing since 2020 and continues to lead search, CRM automation, web, paid media and experiential campaigns for businesses in Canada, the United States, Australia, Egypt and the Philippines. His playbooks are based on that ongoing work. Questions about this playbook: remarcatapangjr@gmail.com
