How to Calculate CAC & LTV
Customer acquisition cost, lifetime value and the ratio investors ask about.
How this number is built
Calculating it yourself
Step 1
Include all sales and marketing cost — salaries, tools and agency fees, not just ad spend.
Step 2
Count only genuinely new paying customers in the denominator.
Step 3
Use gross-margin revenue rather than top-line, or LTV will flatter you.
Step 4
Subtract expansion revenue from churn to get net revenue retention.
Step 5
Watch CAC payback alongside the ratio; a long payback strains cash even at healthy ratios.
What people ask next
Why 3:1?
It is a convention, not a law. It leaves room for overhead and the fact that early lifetime estimates are usually optimistic.
Should CAC include free users?
Only if converting them is the purpose of the spend. Otherwise track it as a separate top-of-funnel cost.
Searches this page answers
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