LTV to CAC calculator

Lifetime gross profit per customer is the profit the business keeps over the relationship, not the revenue the customer pays. This is the single most common place the ratio goes wrong. A business with a thirty per cent margin quoting a revenue-based ratio of three is really at 0.9, which is a loss on every customer, and nothing in the ratio itself reveals it.

Customer acquisition cost is the fully loaded figure: media plus the agency fees, salaries, production and commissions that went into winning the customer. A ratio built on a media-only cost on one side and a lifetime figure on the other is comparing two different books, and it is always the flattering combination that gets quoted.

Target ratio is optional, and deliberately not supplied by this page. The number quoted most often comes from venture-funded software, where marginal cost is near zero and retention runs for years. Your target is whatever leaves enough gross profit, after the media, to cover the overheads, the tax and the return the owner needs.

A ratio is a verdict on the past. The ceiling is an instruction for the next campaign.

Dividing lifetime gross profit by the target ratio gives the most a customer may cost while still clearing it. At 648 of lifetime gross profit and a target of three, the ceiling is 216: acquire customers for less and the target holds, pay more and it does not. Beside an actual acquisition cost of 250, the headroom is negative 34, and the conversation stops being about whether the ratio is good and starts being about a specific gap in a specific currency.

That reframing is the whole value of the page. Everybody can argue about whether a ratio of 2.6 is acceptable. Nobody can argue about whether a customer cost 34 more than the target allows. It is also the only form of the number that can be handed to whoever sets the bids, because a ratio cannot be entered into a bidding tool and a ceiling can.

When the headroom is negative there are exactly two moves, and one of them is almost always ignored.

Lower the cost. This is the move everybody reaches for: better targeting, better creative, excluding what does not convert, improving the conversion rate of the page the click lands on. It is real, and it has a floor — the auction eventually sets a price you cannot get under.

Raise the value. Frequency, order value and margin each raise the lifetime figure and therefore the ceiling, and none of them requires winning a single additional auction. A customer who buys four times a year instead of three raises the ceiling by a third. A bundle that lifts order value by ten per cent lifts the ceiling by the same proportion. A freight renegotiation that adds two points of margin does it again.

The second lever is usually larger, slower and owned by somebody who has never been shown this number. That is a coordination problem rather than a media one, which is why it goes unaddressed for years while the media team is asked to find the difference in the auction.

Anything about time. A ratio of three earned over five years and one earned over nine months are the same number and completely different businesses. The first can be excellent and still insolvent, because the media invoice arrives monthly and the gross profit does not. Read the payback period beside it.

Anything about where the growth came from. Acquisition costs rise as a business exhausts its cheapest audiences. A ratio that fell while volume doubled is often a better outcome than one that held while volume stalled, and the ratio alone reports it as a decline.

Whether the lifetime figure is real. The ratio inherits every assumption in the lifetime estimate — the lifespan, the retention curve, the mix of cohorts. A generous lifespan produces a comfortable ratio out of an uncomfortable business, and the comfort is entirely in the assumption.

Whether the customers are the same people. Discount-acquired customers and full-price customers retain differently. A blended ratio across both hides the fact that one of them is subsidising the other.

Which channel earned it. A single ratio for the whole business averages a channel that acquires loyal customers cheaply with one that acquires one-time buyers expensively, and the average is used to defend both.

Set the target from the profit and loss statement rather than from a convention, and write down what it is covering. Compute the ratio on gross profit on both sides. Compute it by cohort, or at least by channel, because a blended figure is an average of situations you would manage differently.

Then use the ceiling as the actual working number. It is the figure a campaign can be measured against tomorrow, it is expressed in the currency the media is bought in, and unlike the ratio it tells the person setting a bid exactly what they are allowed to pay.