CAC and LTV explained: What does a customer cost — and what is it worth? — the short answer
CAC is the total cost of acquiring new customers divided by the number of new customers in the same period. LTV is the expected value a customer creates through the relationship, preferably measured on contribution margin rather than revenue alone. Use the numbers as decision support, not as exact truths when the data base is small.
- Include both ads, work, production and tools in CAC.
- Use the same period in the numerator and denominator.
- Calculate LTV on earnings when possible.
- Also look at repayment period and liquidity.
How to calculate CAC
Add up all relevant sales and marketing costs for a defined period. Divide the amount by the number of new customers from the same period. If the sales process is long, the delay between expense and agreement must be taken into account.
Be consistent about the scope. A channel CAC can be used to compare campaigns, while an aggregate CAC should also include pay, agency, production and tools. The two numbers answer different questions.
This is how LTV is thought of
LTV can be estimated based on average earnings per customer, purchase frequency and expected customer length. For subscription businesses, retention can be crucial. For project businesses, repeat purchases and recommendations can play larger roles.
If the business is new, the history is limited. Use a conservative interval and update the model when actual customers have completed multiple purchases or periods. A nice LTV number based on hope shouldn't drive the ad budget.
The relationship is not the whole truth
An attractive ratio of LTV to CAC can still hide poor liquidity. If the acquisition is paid for now, but the earnings come over several years, the growth can burden the treasury. Therefore, also look at the repayment period.
Segment the numbers when the amount of data allows. Customers from different channels may have different size, retention and service needs. An overall average can hide both strong and weak parts of the business.
Use the numbers for better questions
CAC and LTV are most valuable when they lead to action. Can onboarding improve retention? Can the message attract more profitable customers? Can the sales process be shortened? Can low-value tasks be automated?
Review the calculation together with finance and sales. Marketing should not own the definition alone, because invoicing, discounts, churn and contribution margin exist elsewhere in the business.
Decision card
| If the situation is | So priorities |
|---|---|
| Low data volume | Use intervals and document assumptions |
| Long payback | Set a lower growth rate or change the payment model |
| Large segment differences | Calculate CAC and LTV per relevant segment |
A concrete action plan
- 1. Select period and write exactly which costs are included.
- 2. Count new customers from the same period and check time lag.
- 3. Estimate customer value based on contribution margin and retention.
- 4. Calculate payback period and a prudent interval.
- 5. Update the model with actual data at a regular rate.
Typical mistakes to avoid
- Using revenue as if it were earnings.
- Omitting employee and production costs.
- To compare channels with different sales delays.
- Making big decisions on few customers.
Frequently asked questions
What does CAC stand for?
Customer Acquisition Cost, i.e. the average cost of acquiring a new customer according to the chosen definition and period.
What does LTV stand for?
Lifetime Value, the expected economic value of a customer throughout the relationship. Preferably calculate on contribution margin and document the assumptions.
What is a good LTV/CAC ratio?
There is no one universal conclusion. Margin, payment period, capital requirements, churn and growth phase change what is sustainable for the company.
Can a small business use CAC?
Yes, but small amounts of data cause large fluctuations. Use the number as an interval, follow specific customers back to the source, and combine with qualitative knowledge from sales.
Get a direction that fits your reality.
Maqeto's configurator matches services by goal, team, status, channels and budget.
Build your packageSources and method
The article is editorial decision support from Maqeto. It is based on official guidelines and Maqeto's practical model. No search volume, market prices, cases or result guarantees have been invented.