The formulas
- CAC = total sales and marketing spend in a period ÷ new customers won in that period.
- LTV (subscription business) = monthly gross profit per customer ÷ monthly churn rate, where gross profit = ARPA × gross margin.
- LTV:CAC = LTV ÷ CAC.
ARPA is the average revenue per account per month. 1 ÷ churn is the average customer lifetime: if 2.5% of customers leave every month, the average customer stays 40 months.
Step 1: a fully loaded CAC
In the quarter, the business spent $54,000 on ads, $96,000 on sales and marketing salaries and commissions, and $18,000 on tools and agencies: $168,000 in total. It won 240 new customers, so CAC = $168,000 ÷ 240 = $700.
Include everything it takes to win customers, not just ad spend, and divide by new customers only. Counting renewals or upgrades as acquisitions makes CAC look smaller than it is.
Worked example: one quarter of a subscription business
Inputs in yellow. The figures describe a fictional business and are for practice only.
| A | B | Formula in B | |
|---|---|---|---|
| 1 | Q3 2026, subscription business | Value | |
| 2 | Ad spend ($) | 54,000 | |
| 3 | Sales & marketing salaries, commissions ($) | 96,000 | |
| 4 | Tools and agencies ($) | 18,000 | |
| 5 | Total acquisition spend | 168,000 | =SUM(B2:B4) |
| 6 | New customers won | 240 | |
| 7 | CAC | 700.00 | =B5/B6 |
| 8 | ARPA, monthly revenue per account ($) | 120.00 | |
| 9 | Gross margin | 78% | |
| 10 | Monthly gross profit per customer | 93.60 | =B8*B9 |
| 11 | Monthly churn | 2.5% | |
| 12 | Average lifetime (months) | 40.0 | =1/B11 |
| 13 | LTV (gross profit) | 3,744.00 | =B10/B11 |
| 14 | LTV:CAC | 5.35x | =B13/B7 |
| 15 | CAC payback (months) | 7.5 | =B7/B10 |
| 16 | Highest churn for LTV:CAC of 3 | 4.46% | =B10/(3*B7) |
Step 2: LTV from gross profit and churn
Customers pay $120 a month. After hosting, support and payment fees, the gross margin is 78%, so each customer brings $93.60 of gross profit a month. With 2.5% monthly churn, the average lifetime is 40 months, and LTV = $93.60 ÷ 2.5% = $3,744.
Step 3: the ratio and what it means
LTV:CAC = $3,744 ÷ $700 = 5.35x. A commonly quoted benchmark for subscription businesses is 3 or more: every dollar spent on acquisition brings back at least three dollars of gross profit. Below 1, growth destroys value, because each new customer costs more than they will ever bring in. A very high ratio is not automatically good news either. It can mean the business is under-investing in growth.
Add CAC payback
LTV is a long-run promise. CAC payback asks how many months of gross profit it takes to earn back the acquisition cost: $700 ÷ $93.60 = 7.5 months. A short payback means the business recovers its cash quickly and can fund its own growth. Two businesses with the same LTV:CAC can have very different cash needs if one pays back in 6 months and the other in 30.
How much churn can the model take?
Turn the formula around to find the break point. For LTV:CAC to stay at 3, churn can be at most gross profit ÷ (3 × CAC) = $93.60 ÷ (3 × $700) = 4.46% a month. Above that, the business fails the benchmark. This is a useful number to put next to the churn chart in every monthly report.
LTV:CAC by channel
The blended CAC of $700 is an average. Suppose paid search costs $950 per new customer and referrals only $300. With the same LTV, paid search has a ratio of 3.94x and referrals 12.48x. Both pass the benchmark, but the next marketing dollar clearly belongs in referrals until that channel saturates. Calculate CAC per channel whenever spend and new customers can be attributed to channels, and check that LTV is similar across them too. Customers from discounts often churn faster.
How shortcuts inflate the ratio
Two common shortcuts change the picture a lot. Using revenue instead of gross profit gives an LTV of $4,800 and a ratio of 6.86x. Counting only ad spend gives a CAC of $225 and a ratio of 16.64x. And the simple formula assumes customers can stay for decades. Many teams cap LTV at three to five years. Over 36 months, the expected gross profit per customer here is $2,239, a ratio of 3.20x. State which definition you use whenever you report the number.
Common mistakes
- Revenue-based LTV. Use gross profit. Revenue ignores the cost of serving the customer.
- Ad spend only in CAC. Salaries, commissions, tools and agencies are part of acquiring customers.
- Dividing by all customers instead of new customers won in the same period.
- Mismatched periods. Monthly churn with annual ARPA, or one quarter's spend with another quarter's new customers.
- A blended ratio that hides bad channels. Calculate CAC per channel: an average of 4x can contain a channel at 1x.
- Churn from a lucky month. Churn is noisy in a small customer base. Use an average over several months, and update LTV when the trend changes.
Frequently asked questions
What is a good LTV:CAC ratio?
A commonly quoted benchmark for subscription businesses is 3:1 or higher. Below 1:1, each new customer loses money. The right target also depends on how fast CAC is paid back and how reliable the churn estimate is.
Should LTV use revenue or gross profit?
Gross profit. Revenue-based LTV ignores the cost of delivering the product or service and makes the ratio look much better than it is.
How do I calculate LTV without churn data?
Use the expected number of months or years a customer stays, multiplied by gross profit per period. For a young business, use a conservative estimate and update it as real retention data comes in.
What is CAC payback?
The number of months of gross profit needed to recover the cost of acquiring a customer: CAC divided by monthly gross profit per customer.