CAC and LTV for small businesses: how much can you pay for a customer?

Customer acquisition cost

CAC = (marketing spend + sales costs attributable to acquisition) ÷ new customers

Include advertising budgets, agency or contractor fees, tools, and — for a fuller picture — the part of sales salaries spent on new customers. Calculate it:

• overall, for the business;
• by channel: Google Ads, Meta, marketplaces, referrals, SEO;
• by campaign where volumes allow.

Channel-level CAC requires knowing which channel each customer came from — see end-to-end analytics.

Customer lifetime value

A simple version:

LTV = average order value × gross margin × average number of purchases per customer

Or, for subscriptions:

LTV = average monthly revenue per customer × gross margin ÷ monthly churn rate

Use gross profit, not revenue — a customer who brings high revenue at low margin is worth less than it looks. For young businesses without long history, estimate with the data you have and update as it grows.

The ratio and payback

• LTV:CAC — how many times the customer's value exceeds the cost of acquiring them. A higher ratio means room to invest more in acquisition; a ratio near or below 1 means you lose money on growth.
• Payback period — how long it takes to earn back the CAC from the customer's profit. Short payback matters for businesses with limited cash.

There is no universal "right" ratio; it depends on your cash position, growth goals and certainty of the data.

Using the numbers

Set a maximum CAC per channel

If a customer's LTV is X and you want a certain ratio, the affordable CAC follows. Compare each channel's actual CAC against it: scale channels below the limit, fix or stop those above it.

Judge campaigns correctly

A campaign with expensive leads but high-value customers can be better than one with cheap leads and low-value customers. Cost per lead alone misleads.

Improve either side

• Lower CAC: better targeting, conversion rate improvements, referral programmes, SEO.
• Raise LTV: retention, repeat purchase programmes, better service, cross-selling, pricing.

Example calculation

Suppose a service business spent a total amount on advertising and sales in a quarter and gained a number of new customers: dividing the first by the second gives the quarter's CAC. If the average customer places several orders a year with a known average order value and margin, and typically stays for a known number of years, multiplying those gives LTV. Replace each input with your real figures; the structure is what matters.

Data needed

• Marketing and sales costs by channel.
• New customers by channel (from the CRM).
• Orders, revenue and margins per customer over time (from sales or accounting data).
• Churn or repeat purchase rates.

A dashboard can calculate these automatically. See dashboards.