LTV and CAC calculator

This LTV to CAC calculator compares what a customer is worth over the whole relationship with what it costs to win them, then shows how many months it takes to earn that cost back. Use it before you raise an ad budget, to answer one question: how much can you afford to pay for a new customer?

How to fill it in

1. Order or contract value. The average amount a customer pays each time they buy, with VAT taken off. For a retainer, use the value of one billing period that matches the frequency you enter next.
2. Gross margin. The percentage left after the direct cost of fulfilling the order: stock, delivery, payment fees, subcontractors, the hours your team spends doing the work. If you already track contribution margin, use that figure.
3. Purchases per year. How often an average customer buys in twelve months. Your order history or accounting software will give you purchase frequency far more reliably than a guess.
4. Customer lifespan. How many years a typical customer keeps buying. If you know your annual churn rate, one divided by that rate is a reasonable starting estimate.
5. Cost to win one customer. Everything you spent on acquisition in a period divided by the new customers it produced: ad spend, agency or freelancer fees, tools, and sales time. This is your customer acquisition cost.
6. Target ratio. The ratio you want to plan against. Three to one is a common planning figure; change it if your cash position or growth plans call for something else.

What each result tells you

Lifetime revenue is order value multiplied by purchases per year and by lifespan. It is shown so you can see how far it sits from the next line, not so you can plan with it.

Lifetime gross profit is the figure I treat as customer lifetime value. It is the money a customer actually leaves behind to pay for marketing, overheads and profit.

LTV to CAC divides that gross profit by your acquisition cost. Below 1:1, every new customer loses you money. Between 1:1 and your target, you are covering acquisition but leaving little for overheads.

Payback is the number of months of gross profit it takes to recover the acquisition cost, assuming purchases are spread evenly across the year. The CAC payback period is the number your bank balance feels.

Maximum viable CAC is lifetime gross profit divided by your target ratio: the ceiling for what you can pay to win a customer and still hit the plan. It is a useful number to hand to whoever manages your ads.

Work it out on margin, not on turnover

Take the default figures. A £5,000 contract bought twice a year for three years is £30,000 of revenue. At a 45% margin, the gross profit is £13,500. Against a £6,000 acquisition cost, that is a ratio of 2.25:1, below a 3:1 plan, and it takes 16 months to earn the £6,000 back.

Run the same sum on revenue and the ratio looks like 5:1, which would justify spending far more on ads than the business can carry. Check the margin figure before you trust any of the results.

Why payback can matter more than the ratio

A healthy ratio says the customer is worth winning eventually. Payback says when. If it takes 16 months to recover the cost of a customer, you are funding well over a year of acquisition spend before each new account adds to your cash. For a small UK business without outside investment, that gap is often what limits growth, long before profitability does. The calculator flags anything over twelve months for this reason.

Shortening payback usually comes from raising the first order value, improving the repeat rate in the early months, or bringing down acquisition cost through better targeting and landing pages. A longer lifespan helps the ratio but does nothing for payback.

What this calculator leaves out

• Averages hide segments. One channel or product line may bring customers who stay for years while another brings one-off buyers. A cohort analysis by acquisition month and channel shows which is which.
• Lifespan is a forecast. A business under two years old cannot know how long customers stay, so treat that input as an assumption and test a lower figure as well.
• Future money is worth less. The sums take no account of inflation or the cost of borrowing, which matters more as the lifespan gets longer.
• Retention costs are not counted. Account management, loyalty discounts and email programmes all reduce the real lifetime value, so subtract them from the margin if they are significant.

Turning the result into an ad budget

Once you know your maximum viable CAC, you can work back to a target for each campaign. The ROAS and break-even ROAS calculator does that for ecommerce spend, where returns are measured per order rather than per customer.

If your numbers show a ratio below plan or a long payback, the fix is rarely just a new campaign. My digital marketing strategy work uses these figures to decide which channels can afford to win customers at your margin, and performance marketing management runs the paid channels against the acquisition cost you set. If you would like a second opinion on your inputs, send me your figures and I will tell you which one I would question first.