LTV/CAC Ratio Calculator

What This Calculator Does

The LTV/CAC Ratio Calculator provides a clear benchmark of your business’s unit economics by comparing your Customer Lifetime Value (LTV) with your Customer Acquisition Cost (CAC). By inputting a few essential data points, you get actionable metrics that help you assess how efficiently your company turns customer investments into long-term profit. A healthy LTV/CAC ratio is crucial for making informed decisions about growth, marketing spend, and overall sustainability.

How to Use This Calculator

1. Enter Average Revenue per User (Monthly): Input the typical monthly revenue you receive from a single customer. This is often calculated as your total revenue divided by the number of active users.
2. Input Gross Margin %: Provide your business’s gross margin percentage. This reflects your profit after accounting for the direct costs of providing your product or service, before operating expenses.
3. Add Your Monthly Churn Rate: Fill in the percentage of customers who cancel or do not renew their subscription each month. Churn rate helps estimate customer lifetime.
4. Enter Customer Acquisition Cost (CAC): Specify how much it costs, on average, to acquire a new customer. This includes marketing and sales expenses.
5. Review Your Results: Instantly see the calculated Customer Lifetime Value (LTV), Gross Profit per User, and the all-important LTV/CAC Ratio. Use these results to evaluate your business’s financial health and make data-driven decisions.

Definitions of Key Terms

Average Revenue per User (Monthly)

The average amount of revenue received from each customer per month. Commonly abbreviated as ARPU, this metric is calculated by dividing total monthly revenue by the number of active users.

Gross Margin %

The percentage of total revenue that you retain after incurring the direct costs of providing your goods or services (cost of goods sold). A higher gross margin means more profit is retained from each sale.

Monthly Churn Rate

The percentage of customers who stop using your service or cancel their subscription in a given month. Churn rate is a key factor in determining how long a typical customer stays with your business.

Customer Acquisition Cost (CAC)

The average amount spent to acquire each new customer, including marketing, advertising, sales team, and onboarding costs.

Customer Lifetime Value (LTV)

The total gross profit a business expects to earn from a single customer over the entire period of their relationship.

Gross Profit / User

The average profit that a business makes from each user, after subtracting the direct costs of serving that user, but before operating expenses.

LTV / CAC Ratio

A key metric showing the relationship between the value of a customer over their lifetime and the cost to acquire them. A higher ratio indicates healthier, more sustainable growth.

Calculation Methodology

Customer Lifetime (months) = 1 / Monthly Churn Rate

Gross Profit per User (monthly) = Average Revenue per User (Monthly) × (Gross Margin % / 100)

Customer Lifetime Value (LTV) = Gross Profit per User (monthly) × Customer Lifetime (months)

LTV/CAC Ratio = Customer Lifetime Value / Customer Acquisition Cost

In these formulas:
Average Revenue per User (Monthly) is the average monthly revenue per customer.
Gross Margin % is entered as a whole number (e.g., 75 for 75 percent).
Monthly Churn Rate should be expressed as a decimal (e.g., 0.05 for 5 percent).
Customer Acquisition Cost is the total average cost to acquire a new customer.
The calculator multiplies your average monthly gross profit per user by the expected lifetime (in months) of a customer, then divides the result by your CAC to yield the LTV/CAC ratio. The higher the ratio, the more value you generate from each dollar spent on customer acquisition.

Practical Scenarios

• Startup Assessing Product-Market Fit: A SaaS startup uses the calculator to quickly determine if their LTV/CAC ratio is above the recommended benchmark (typically 3:1 or higher), helping them decide whether to scale up marketing or focus on retention.
• Marketing Budget Planning: A marketing manager enters quarterly CAC and revenue data to gauge if recent campaigns are increasing LTV efficiently, providing insights into where to allocate more budget.
• Subscription Business Growth Analysis: An e-commerce subscription box company evaluates how changes in customer retention (churn reduction initiatives) impact LTV and overall profitability.
• Investor Due Diligence: Founders preparing for fundraising use the calculator to summarize their unit economics for potential investors, showing their business model’s sustainability and growth potential.

Advanced Tips & Best Practices

• Refine Churn Calculations: For greater accuracy, segment churn rates by customer cohort or subscription plan, as different segments may have different retention patterns.
• Update CAC Regularly: Customer Acquisition Cost can fluctuate with marketing changes, seasonality, or new channels. Recalculate regularly to ensure your ratio reflects current performance.
• Track Gross Margin Closely: Small changes in gross margin can have a significant impact on LTV. Factor in variable costs, discounts, and promotions to avoid overestimating profitability.
• Benchmark LTV/CAC Ratio: Aim for an LTV/CAC ratio of at least 3:1. Ratios below 1 mean you are losing money on customer acquisition, while ratios above 3 indicate healthy scalability.
• Combine with Other Metrics: Use this ratio alongside metrics like payback period and retention rate for a holistic view of customer acquisition and lifetime value.

Frequently Asked Questions (Optional)

What is a “good” LTV/CAC ratio?

A commonly cited best practice is an LTV/CAC ratio of 3:1 or higher. This means you generate three times more value from a customer than it costs to acquire them. Ratios lower than 1 indicate unprofitable growth and may require immediate attention.

How often should I recalculate my LTV/CAC ratio?

It is recommended to review your LTV/CAC ratio monthly or quarterly, especially after launching new products, entering new markets, or changing your marketing strategy. Regular recalculation ensures your decisions are based on the latest data.

Should I include all costs in CAC?

Yes, CAC should include all direct costs related to acquiring new customers, such as marketing, advertising, sales team salaries, commissions, and onboarding expenses. Exclude costs not directly tied to acquisition, like long-term support or product development.