Formulas

LTV to CAC ratio: the formula and a worked example

The LTV to CAC ratio compares what a customer is worth over their time with you against what it cost to acquire them.

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A ratio of 3 means each customer returns three times their acquisition cost. The formula is a single division; the mistakes are in how the two inputs are built, and in a rule of thumb repeated more often than it is checked.

The formula

LTV:CAC = customer lifetime value ÷ customer acquisition cost

Both inputs are calculated figures themselves. Customer lifetime value should be gross profit per customer over their lifetime, not revenue. CAC is acquisition spend divided by the new customers it produced, over the same period.

In Google Sheets, with CAC in column D and LTV in column E:

=IF(D2=0, "", E2/D2)

Format the column as a number to two decimal places, or write it as a ratio (3.2:1) if that reads better to the people you report to.

A worked example

In the total row, CAC is total spend over total customers (12,000 ÷ 340 = 35.29). LTV is the customer-weighted average, =SUMPRODUCT(C2:C4, E2:E4)/C5, which is 38,800 ÷ 340 = 114.12. The ratio is 114.12 ÷ 35.29 = 3.23. Averaging the three channel ratios gives 3.22 here, close by luck; with channels of very different sizes it would not be.

The common mistake

Building LTV from revenue instead of gross profit.

Take the paid social customer. Suppose they spend £187.50 with you over their lifetime and your gross margin is 40%. Their lifetime gross profit is £75.00, and against a £30.00 CAC the ratio is 2.50. Use the revenue figure and the ratio becomes 187.50 ÷ 30.00 = 6.25. The number has more than doubled for the same customer and the same spend. Revenue-based LTV makes every channel look like it pays for itself, which is the one thing the ratio exists to test. If you report the revenue version, say so in the label, and work out gross margin before anyone makes a budget decision on it.

What counts as good

The widely quoted target is 3, and it has a source: an essay by David Skok on forentrepreneurs.com, written for subscription software businesses around 2013, where the guideline is that LTV should be more than three times CAC (Skok, SaaS Metrics 2.0). The argument is that below it you are overpaying for customers and far above it you are underspending on growth. His definitions page adds the part that gets dropped: the guideline assumes the simpler LTV formula with no gross margin adjustment, and a gross margin of 80% or higher (Skok, definitions page). A shop at 40% margin that quotes 3 against a revenue-based LTV has borrowed a number built for a business with twice its margin. Treat it as one investor's rule for one kind of business. The ratio that matters for you also depends on how long the value takes to arrive. A ratio paid back over six years is a different business from the same ratio paid back in six months, which is why CAC payback period belongs beside this one.

Keeping the inputs current

A scheduled Fresh Sheets report can keep Google Ads Cost for every campaign in a tab called Google Ads, and a second can keep Shopify orders and sales in a tab called Shopify. New customer counts and gross margin go in cells on your formulas tab.

Fresh Sheets replaces each tab's contents on every refresh, so keep your formulas on a separate tab. This version finds the spend column by its heading, so the CAC half still works if you add a field and the columns move:

=E2 / (SUM(INDEX('Google Ads'!A:Z, 0, MATCH("Cost", 'Google Ads'!1:1, 0))) / B2)

where E2 holds blended LTV and B2 the number of new customers in the period.

If you also advertise on Meta Ads, a Meta Ads tab adds its spend to the Google Ads cost the same way, with the heading "Amount spent".