The formula
LTV:CAC = lifetime value ÷ customer acquisition cost
Shopify's guide gives it as CLV ÷ CAC and adds the step that matters most: multiply CLV by gross margin to see the profit per customer rather than the spend. HubSpot's CAC is (cost of sales + cost of marketing) ÷ new customers.
Example one: a subscription
A software tool charges $49 a month. Each month 3.5% of paying customers cancel. Gross margin, after hosting, support and payment fees, is 78%. Last quarter it spent $50,400 on sales and marketing and won 120 new customers.
- CAC = $50,400 ÷ 120 = $420.
- Average lifetime = 1 ÷ 0.035 = 28.6 months, assuming churn stays steady.
- Lifetime revenue = $49 ÷ 0.035 = $1,400.
- Lifetime value (gross profit) = $1,400 × 0.78 = $1,092.
- LTV:CAC = $1,092 ÷ $420 = 2.60:1.
- CAC payback = $420 ÷ ($49 × 0.78) = $420 ÷ $38.22 = 11.0 months.
Payback is the number many teams watch alongside the ratio, because it says how long cash is tied up in each new customer before it comes back.
Example two: repeat purchases
A coffee shop online. Average order $50, customers order 3 times a year and keep buying for about 2 years (Shopify's own example numbers). Gross margin 40%. Paid social, the only channel, cost $5,400 last quarter for 120 first orders.
- CAC = $5,400 ÷ 120 = $45.
- Lifetime revenue = $50 × 3 × 2 = $300.
- Lifetime value = $300 × 0.40 = $120.
- LTV:CAC = $120 ÷ $45 = 2.67:1.
Using revenue instead, the ratio would be $300 ÷ $45 = 6.67:1. Same business, same customers, and the ratio is two and a half times higher only because margin was left out.
| Version | LTV | CAC | Ratio |
|---|---|---|---|
| Revenue LTV, paid CAC | $300 | $45 | 6.67:1 |
| Profit LTV, paid CAC | $120 | $45 | 2.67:1 |
| Profit LTV, CAC with $1,800 of staff time added | $120 | $60 | 2.00:1 |
Four inputs that inflate the ratio
1. Revenue instead of gross profit. As above. The customer's spend is not what you keep.
2. Paid-only CAC. Leaving out salaries, agency fees and tools makes CAC smaller. That is fine for comparing ad channels; for judging the business, use the fully loaded figure HubSpot describes.
3. Blended customers. If the CAC counts every new customer, including those who came by word of mouth, it is lower than the cost of the next customer you have to buy. Some teams track a "paid CAC" over paid customers only for this reason.
4. An optimistic lifetime. A young business has not seen customers for long enough to know how long they stay. A 5-year lifetime guessed from 8 months of data is a forecast, not a measurement. Prefer the lifetime you have observed, and revisit it as data arrives.
Matching the two halves
LTV and CAC should describe the same customers. If a new pricing plan changed retention, the LTV from last year's customers does not describe this year's. If one channel brings customers who churn faster, a blended LTV hides it; split both halves by channel where you can.
This guide gives no "target" ratio. Thresholds you may see quoted rarely say which LTV and CAC definitions they assume, and a target only means something if your inputs match its definitions. Track your own ratio over time, worked the same way each time, alongside payback months.
Run your own numbers
The LTV calculator does both models, with margin, the ratio and payback. The CAC calculator solves CAC, spend or customer count, and the conversion rate calculator shows how a better conversion rate cuts CAC on the same spend.