Questions people ask
How do you calculate customer acquisition cost?
Divide total sales and marketing spend for a period by the number of new customers won in the same period. If you spent 10,000 and gained 200 customers, CAC is 50. Include agency fees, tools and salaries if you want the fully loaded figure.
What is a good LTV to CAC ratio?
The common benchmark is 3 to 1 on gross margin LTV. Below 1 to 1 you lose money on every customer. Between 1 and 3 the business works but has little room for error. Well above 5 usually means you are underspending on growth.
How is the payback period calculated?
CAC divided by the gross profit a customer generates per month. A 120 CAC against 40 of monthly gross profit pays back in 3 months. Subscription businesses usually want payback under 12 months; ecommerce brands often want it inside the first order or two.
Why use gross margin rather than revenue for LTV?
Revenue LTV flatters every number. A customer who pays 100 a month on 20 percent margin only leaves 20 to cover acquisition and overheads. Margin based LTV is the figure that tells you whether the ad spend is actually coming back.