The formula
CAC = acquisition spend ÷ new customers · LTV = order value × orders a year × years × margin
What it means
The industry benchmark is an LTV/CAC ratio of at least 3. Below that, each new customer brings in little more than it cost to bring them in and there is nothing left for the rest of the business. Above 5, you are probably investing less in growth than you could.
How to work it out by hand
- Divide all the acquisition spend by the customers won
- Multiply the average order value by orders a year and by years retained
- Apply your gross margin to that total revenue
- Divide the LTV by the CAC
What is worth knowing
The payback period matters as much as the ratio. If it takes eighteen months to recover what you spent winning a customer, you need a lot of cash to grow even on an excellent ratio. That is why subscription businesses watch that number so closely: twelve months is generally taken as the sensible limit.