The two most important numbers in any growth business are LTV (Lifetime Value of a customer) and CAC (Customer Acquisition Cost). The ratio between them tells you whether you're building a real business or burning money.
What LTV is
LTV is the total revenue (or gross profit) you earn from a typical customer across the time they stay with you.
The simplest version:
LTV = Average order value × Purchases per year × Years they stay
E-commerce: $80 average order × 4 orders/year × 2 years = $640 LTV
Plumber: $400 average call × 1.5 calls/year × 5 years = $3,000 LTV
For a more honest number, multiply by your gross margin. Gross-margin LTV is what you can actually spend on acquisition.
What CAC is
CAC is what you spend to acquire one customer.
CAC = Total marketing & sales spend / New customers acquired in the same period
Be honest about what counts as "marketing spend." If you have a salaried marketer, divide their salary into CAC too. If you pay for tools (analytics, email, this product), include it. Otherwise CAC looks great until you can't pay rent.
The LTV:CAC ratio
The single most important ratio in any business. Industry rules of thumb:
- Less than 1:1 — you're losing money on every customer. Stop scaling immediately.
- 1:1 to 2:1 — barely profitable. You can't afford to grow.
- 3:1 — healthy. The startup industry's target.
- Higher than 5:1 — you're under-investing in marketing. Spend more.
How LTV/CAC drives your ad budget decisions
If LTV:CAC is healthy (3:1+)
You can afford to bid more aggressively. Raise your max CPA target. Spend the additional budget on the next-most-converting platforms. The math works; faster growth is just a question of how much capital you have.
If LTV:CAC is breakeven (1-2x)
Don't scale ads. Either:
- Increase LTV (raise prices, add upsells, retain better)
- Decrease CAC (better ad copy, lower CPC, conversion-rate optimization)
More ad spend on a broken funnel just means losing money faster.
If LTV:CAC is upside down
You have a unit economics problem, not a marketing problem. No paid channel will save you. Fix the product, the price, or the retention before scaling spend.
How to measure LTV and CAC if you don't have a year of data
You can't measure 3-year LTV in your first 6 months. Cohort math:
- Look at customers from your first 90 days. What % renewed at month 1, 2, 3, 6?
- Project forward — if month-on-month retention is 90%, multiply current revenue by your projection horizon.
- Be conservative. Halving your projected LTV until you have real data prevents over-spending.
Connecting this back to your ads
Your target CPA on every paid channel should be set based on LTV — not on what feels comfortable. If your gross-margin LTV is $1,200 and you want LTV:CAC ≥ 3:1, your max CPA is $400. Set Target CPA in Google Ads at ~$350 (slightly under to give the algorithm room to deliver).