E-Commerce Finance
LTV:CAC Ratio & Payback Calculator
The LTV:CAC Ratio and Payback Calculator measures whether the lifetime value of a customer justifies what you pay to acquire them. From your average order value, gross margin, purchase frequency, and customer lifespan it computes lifetime value, divides it by your customer acquisition cost to get the LTV:CAC ratio, and calculates how many months it takes to earn that acquisition cost back. The result tells you whether your acquisition is building a profitable business or quietly draining cash.
Who it's for: DTC founders and growth leads who want to know whether their customer acquisition cost is sustainable relative to the long-term, margin-adjusted value of a customer.
How the LTV:CAC Ratio & Payback Calculator works
You enter your average order value, gross margin percentage, purchase frequency in orders per year, average customer lifespan in years, and your customer acquisition cost. Lifetime value is AOV multiplied by gross margin, then by orders per year, then by lifespan years, so it reflects the total gross profit a customer generates over their relationship with you rather than just their first order's revenue.
The LTV:CAC ratio divides that lifetime value by your acquisition cost, giving a single number that says how many times over each customer pays back what you spent to win them. A ratio of 3 means a customer is worth three times their acquisition cost in margin over their lifetime, which leaves healthy room for overhead and profit after the cost of acquiring them. Because the LTV here is already margin-adjusted, the ratio compares like with like, profit against the cost of earning it, rather than revenue against cost, which would flatter the number.
CAC payback period answers a different, cash-focused question: how many months of that customer's margin it takes to recover the acquisition cost. It is CAC divided by the monthly gross profit per customer, which is AOV times gross margin times orders per year divided by twelve. A long ratio paired with a long payback can still strain cash flow, because value that arrives over years does not pay this month's bills.
Read the two metrics together. The ratio tells you whether the economics work over a customer's full lifetime, while payback tells you how quickly you get your money back to reinvest. A business can show a strong LTV:CAC ratio yet run short on cash if payback stretches too long, so growth-stage brands watch payback closely alongside the ratio when deciding how aggressively to spend on acquisition.
The formula
LTV = AOV x gross margin x orders per year x lifespan years. LTV:CAC ratio = LTV / CAC. CAC payback period (months) = CAC / (AOV x gross margin x orders per year / 12).
Frequently asked questions
What is a good LTV:CAC ratio?+
A ratio around 3:1 is the figure most commonly cited as healthy, meaning a customer returns about three times their acquisition cost in lifetime margin, with enough left over for overhead and profit. Below 1:1 you are losing money on acquisition because customers are worth less than you pay to get them. A very high ratio, such as 5:1 or more, can signal you are underinvesting in growth and could profitably acquire faster.
Why is gross margin included in the LTV calculation?+
Lifetime value should reflect the profit a customer generates, not their raw revenue, because you cannot spend revenue you never keep. Multiplying by gross margin converts order value into the gross profit actually available to cover acquisition cost and everything after it. Comparing a revenue-based LTV against CAC would badly overstate your ratio and make unprofitable acquisition look healthy.
What is CAC payback period and what is a good target?+
CAC payback period is the number of months of a customer's gross profit it takes to recover what you spent acquiring them. For ecommerce, recovering acquisition cost in under roughly 12 months is a commonly cited target, and faster is better because it frees cash to reinvest sooner. A payback longer than a year ties up capital and raises the risk that customers churn before they ever become profitable.
Why can a healthy LTV:CAC ratio still cause cash flow problems?+
The ratio measures value over a customer's entire lifespan, which may span several years, while your ad invoices and operating costs come due every month. If most of a customer's value arrives slowly, a strong long-term ratio can coincide with a long payback that drains cash today. This is why fast-scaling brands track payback period alongside the ratio rather than relying on the ratio alone.
How do I estimate purchase frequency and customer lifespan?+
Purchase frequency is the average number of orders a customer places per year, and lifespan is the average number of years they keep buying before churning, both ideally pulled from your own cohort or repeat-purchase data. If you lack history, start with conservative estimates and refine them as cohorts mature, since overstating either input inflates LTV and your ratio. Be especially careful with lifespan, because LTV scales directly with it, so doubling assumed lifespan doubles your reported lifetime value and can make shaky acquisition look healthy. When in doubt, model a shorter lifespan and a lower frequency first, then revisit as real retention data comes in.