How it’s calculated
- Annual Gross Profit
- equals Order Value × Purchases per Year × Gross Margin
- Customer Lifetime Value
- equals Annual Gross Profit × Lifespan (years)
- LTV:CAC
- equals Lifetime Value ÷ Acquisition Cost
- CAC Payback (months)
- equals Acquisition Cost ÷ (Annual Gross Profit ÷ 12)
We use gross profit rather than revenue, because the cost of the goods you sell isn’t available to pay for acquiring customers.
Worked example
A specialty coffee roaster’s typical subscriber orders a $32 bag ten times a year at a 55% gross margin and stays about 2.5 years. Winning each subscriber costs about $60 in advertising.
- Annual gross profit = $32 × 10 × 55% = $176.00
- Lifetime value = $176.00 × 2.5 = $440.00
- LTV:CAC = $440.00 ÷ $60 = 7.33 : 1
- CAC payback = $60 ÷ ($176.00 ÷ 12) = 4.09 months
The roaster recovers its acquisition cost in about four months — a strong position that could justify spending more to grow.
Assumptions and limitations
- Uses averages. Customers vary widely; segmenting by channel or product often reveals very different values.
- Undiscounted: a dollar of profit in year three counts the same as one today. For long lifespans, discounted CLV will be lower.
- Lifespan is often estimated as 1 ÷ annual churn rate. New businesses should treat early estimates cautiously.
- A common rule of thumb is an LTV:CAC ratio of about 3:1 or better, but the right target depends on your margins, cash position and growth goals.
Results are estimates for information only and are not financial, tax or legal advice. See our disclaimer.