CAC payback and LTV:CAC, explained
How to work out CAC payback and the LTV to CAC ratio, with a worked example and the mistakes that make both look better than they are.
CAC payback is how many months of a customer's gross profit it takes to earn back what it cost to win them. LTV:CAC compares what a customer is worth over their whole relationship with what it cost to acquire them. Both depend on the same input: an honest CAC.
The formulas
- CAC = (sales and marketing spend) ÷ new customers.
- Monthly gross profit per customer = monthly revenue per customer × gross margin.
- CAC payback (months) = CAC ÷ monthly gross profit per customer.
- LTV = monthly gross profit per customer ÷ monthly churn rate.
- LTV:CAC = LTV ÷ CAC.
A worked example
Say a customer costs $12,000 to acquire, pays $2,000 a month, your gross margin is 75% and 3% of customers leave each month. The figures are illustrative.
- Monthly gross profit: $2,000 × 75% = $1,500.
- CAC payback: $12,000 ÷ $1,500 = 8 months.
- LTV: $1,500 ÷ 3% = $50,000.
- LTV:CAC: $50,000 ÷ $12,000 = about 4.2 : 1.
The CAC calculator runs these sums for you, overall and by channel.
What good looks like
A common rule of thumb is an LTV:CAC of around 3:1 or better, and a payback short enough that you are not funding customers for years before they repay. Both depend on your margins, your cash position and how reliable your churn figure is, so treat them as a guide, not a rule.
Mistakes that flatter the numbers
- Leaving costs out. Fully loaded CAC includes salaries, tools and agency fees, not just ad spend.
- Using revenue instead of gross profit. That overstates payback and LTV.
- Counting customers the platforms claim. If two platforms each claim the same customer, channel CAC looks lower than it is. Count customers from your CRM, once each; see why platforms double-count.
- Guessing churn. A small change in churn moves LTV a lot.
To see the funnel behind your CAC, use the funnel calculator, and for what a LinkedIn customer costs, the LinkedIn Ads cost guide.
Questions people ask
What is a good CAC payback period?
It depends on your cash position and churn. Shorter is safer, because the longer the payback, the longer you carry the cost of each new customer.
Should CAC include salaries?
For fully loaded CAC, yes: include sales and marketing salaries, tools and agency fees. Paid CAC counts ad spend only, and is useful for comparing channels.
What is the difference between LTV and CAC?
CAC is what a customer costs to win. LTV is the gross profit a customer is expected to bring over their lifetime. The ratio between them shows whether acquisition pays.
Related: blended CAC and MER vs ROAS.
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