Why this matters
As a Marketing Analyst, you will be asked to answer questions like:
- Which channel should get more budget next month?
- Are we acquiring profitable customers or just buying revenue?
- How long until we recover acquisition costs (payback period)?
- Is our growth sustainable under current margins and churn?
The CAC to LTV ratio is a compact way to connect spend to long-term value, and it is most reliable when built on cohort LTV.
Concept explained simply
Think of CAC as the price tag to acquire one customer and LTV as the value basket the customer brings over time. The ratio tells you if the trade is good.
- LTV:CAC (common) = LTV divided by CAC. Bigger is better. Many teams aim for ~3:1 depending on stage and cash needs.
- CAC to LTV ratio (inverse) = CAC divided by LTV. Smaller is better. Aim < 1, often < 0.33 if you target 3:1.
Key formulas and definitions
- CAC = Marketing spend attributable to acquisition / New customers acquired in the period.
- Cohort LTV (windowed) = Sum over periods of (Average revenue per customer in cohort × Gross margin × Retention for that period). Using 3, 6, or 12-month windows is common.
- LTV:CAC = LTV / CAC. CAC to LTV ratio = CAC / LTV. Be explicit which one you use to avoid confusion.
- Payback period = First period where cumulative gross profit per customer ≥ CAC.
- Use gross margin, not revenue, to represent value that can actually fund acquisition and ops.
Mental model
Picture a lever. On one side: CAC (cost). On the other: a staircase of cash flows from a cohort (LTV). You want the staircase to rise above the cost quickly (payback) and end much higher than the cost (healthy ratio).
Data you need
- Marketing spend by channel/campaign and time period.
- New customers by the same channel/campaign and period (clean attribution rules).
- Cohort revenue by month since acquisition, or ARPU and retention by month.
- Gross margin % to convert revenue to gross profit.
- Refunds/discounts policy and any recurring billing specifics.
How to compute it step-by-step
- Choose your window: 3, 6, 12 months (match cash needs and decision horizon).
- Calculate CAC per channel: spend / new customers.
- Build cohort LTV for the same acquisition month and window using gross profit.
- Compute the ratio: LTV:CAC or its inverse (state which).
- Check payback: cumulative gross profit per customer by month vs. CAC.
- Segment by channel, campaign, and audience to reveal differences.
Worked examples
Example 1 — Subscription app (6-month window)
- Monthly net revenue after COGS per active user (NRPU): $30
- Retention by month since acquisition: 100%, 70%, 60%, 55%, 52%, 50%
- LTV6 = 30 × (1 + 0.70 + 0.60 + 0.55 + 0.52 + 0.50) = 30 × 3.87 = $116.10
- Channels and CAC: A $50, B $90, C $100
- LTV:CAC: A 2.32:1, B 1.29:1, C 1.16:1
- Payback by month using cumulative NRPU per user: [30, 51, 69, 85.5, 101.1, 116.1]. A pays back in month 2, B in month 5, C in month 6.
Decision: Favor Channel A. B and C need creative, targeting, or pricing fixes before scaling.
Example 2 — E-commerce (180-day window)
- AOV = $60, Gross margin = 40% → Gross profit per order = $24
- Orders per customer in 180 days: 1st 100%, 2nd 35%, 3rd 15% → Expected orders = 1.50
- LTV180 = 1.50 × $24 = $36
- CACs: Prospecting $12 → 3.0:1; Retargeting $25 → 1.44:1; Influencer $40 → 0.9:1
Decision: Scale Prospecting. Fix economics for others (margin, AOV, bundling, fees) before scaling.
Example 3 — B2B SaaS (annual)
- ARPA monthly = $200, Gross margin = 80%, Logo churn = 2%/month
- Approx LTV = (ARPA × Margin) / Churn = (200 × 0.8) / 0.02 = 160 / 0.02 = $8,000
- Blended CAC = Total acquisition spend / New customers = $400k / 1,000 = $400
- LTV:CAC ≈ 20:1; Payback ≈ CAC / monthly gross profit per customer = 400 / 160 = 2.5 months
Decision: Excellent unit economics. Investigate if you can grow faster even with higher CAC targets.
Quality checks and common mistakes
- Using revenue instead of gross profit. Fix: multiply revenue by gross margin or subtract COGS.
- Mixing attribution windows (e.g., last-click for CAC, first-touch for LTV). Fix: align definitions or report both.
- Ignoring cohorts. Fix: compute LTV by acquisition month to capture retention curves.
- Over-optimistic long horizons. Fix: use windowed LTV (3–12 months) for budgeting and cash planning.
- Blended vs. channel CAC confusion. Fix: report both; use channel CAC for optimization, blended for board-level view.
- Not stating which ratio you use. Fix: always label “LTV:CAC” or “CAC/LTV”.
Self-check
- Does LTV use gross margin and reflect cohort retention?
- Is the CAC period aligned to the cohort start?
- Is the chosen window clear (e.g., 6-month LTV)?
- Is the ratio label unambiguous?
Practical projects
- Build a cohort LTV calculator (spreadsheet) with inputs for ARPU, margin, and monthly retention.
- Create a channel dashboard showing CAC, LTV, LTV:CAC, and payback by month.
- Run a sensitivity analysis: how do CAC targets change with +/− 10% margin or churn?
Exercises
Try these before the quick test. Then compare with the solutions.
- [ ] Compute CAC for each channel.
- [ ] Build 6-month cohort LTV using gross profit.
- [ ] Calculate LTV:CAC and payback; make a budget recommendation.
Exercise 1 summary
Use a subscription scenario: CACs A $50, B $90, C $100. NRPU $30; retention: 100%, 70%, 60%, 55%, 52%, 50%. Compute LTV6, LTV:CAC per channel, and payback month. Recommend channels to scale and channels to fix.
Exercise 2 summary
Use an e-commerce scenario: AOV $60, margin 40%, 180-day orders per customer: 1.0, 0.35, 0.15. Campaign CACs: Prospecting $12, Retargeting $25, Influencer $40. Compute LTV180, ratios, and a budget plan.
Who this is for
- Marketing Analysts and Growth Analysts who allocate budget or report unit economics.
- Product and Finance partners needing cash payback and ROI guardrails.
Prerequisites
- Basic spreadsheet skills (summing, cumulative sums, simple division).
- Know gross margin vs. revenue, and the idea of cohorts and retention.
Learning path
- Start: Cohort and retention fundamentals.
- Then: Build windowed LTV using gross profit.
- Now: Calculate CAC by channel and compute LTV:CAC and payback.
- Advance: Sensitivity analysis, segment by audience, creative, and offer.
Next steps
- Apply these calculations to your last 3 months of acquisition.
- Set channel-specific CAC targets tied to a payback goal.
- Revisit monthly; update with new cohort performance.
Mini challenge
Your CFO wants 4-month payback. Current NRPU per month is $18 with retention 100%, 80%, 70%, 60%. What is the maximum CAC you can afford while hitting 4-month payback? Show your cumulative gross profit math and state assumptions.
FAQ
What is a good LTV:CAC?
Common target is around 3:1. Early-stage or cash-constrained teams may require faster payback, while high-LTV businesses may tolerate lower ratios temporarily. Context matters.
Windowed vs lifetime LTV?
Windowed LTV (e.g., 6 or 12 months) is safer for budgeting and cash planning. Lifetime LTV can be optimistic if churn or margins change.
How often should I update the ratio?
Monthly is typical. Recalculate when pricing, margins, or funnel conversion changes significantly.
Quick Test
The test is available to everyone. Only logged-in users will have their progress saved.