Customer acquisition cost (CAC) and lifetime value (LTV)

If you spend more to win a customer than that customer will bring in, you lose money as you grow. CAC and LTV are two core metrics that show this balance and are among the first numbers investors check.

What is CAC?

Customer acquisition cost (CAC) is total sales and marketing spend in a period divided by the number of new customers won in the same period.

*Example:* In one month you spend 50,000 on ads, content and the sales team and win 100 new customers. CAC = 50,000 / 100 = 500.

Besides ad spend, include sales salaries, tool subscriptions and agency fees.

What is LTV?

Customer lifetime value (LTV) is the total gross profit a customer leaves over the time they stay with you. A simple formula:

LTV = Average monthly revenue × Gross margin × Customer lifetime (months)

Lifetime is roughly 1 / monthly churn rate. To cut churn, see our churn guide.

The LTV / CAC ratio

• 3 or higher: Generally considered healthy.
• Between 1 and 3: Weak unit economics; improvement needed.
• Below 1: You lose money on every customer.
• Very high (e.g. 8+): You may be under-investing in growth.

For the wider unit-economics frame, see AI costs and unit economics and the financial model guide.

Payback period

How many months it takes for monthly gross profit from a customer to repay CAC. For subscription models like SaaS, under 12 months is often considered good, though it varies by sector.

How to lower CAC

1. Concentrate on channels with high conversion.
2. Test your landing page and offer; see A/B testing.
3. Grow free channels such as referrals and community; see community-led growth.
4. Shorten the sales cycle.

How to raise LTV

1. Reduce churn.
2. Upsell and cross-sell.
3. Update pricing to match value.
4. Embed users deeper in the product.

Common mistakes

• Counting only ad spend as CAC
• Using revenue instead of gross profit
• Overstating customer lifetime by assumption
• Blending all channels into one average; calculate per channel