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LTV:CAC ratio

The LTV:CAC ratio is the value a customer brings a store across all their orders, divided by what it cost to win that customer.

How it works

The ratio compares customer lifetime value, what a customer brings over all their orders, with customer acquisition cost, what the store spent to win them. Counted on gross profit, a ratio above 1 means a customer brings back more than they cost; below 1, each new customer is a loss.

Google Ads shows neither number: repeat orders are recorded in the store’s own order history, so the store counts the ratio from its own data. There is no single benchmark for online stores: the level a store needs depends on margin, order costs and how long it can wait for repeat orders. How much a first order can afford to lose: LTV:CAC for online stores.

Formula

Customer lifetime value ÷ customer acquisition cost

Ways to calculate

Example

Example store, not client data.

The tableware shop spends 40,000 a month; 180 of its 300 orders are first purchases. If all spend is charged to new customers, CAC = 40,000 ÷ 180 ≈ 222.

On average, a customer places 1.6 orders of 600 over two years: LTV is 960 in revenue, or 336 in gross profit at a 35% margin. LTV:CAC = 960 ÷ 222 ≈ 4.3 on revenue, 336 ÷ 222 ≈ 1.5 on gross profit. The first order leaves 210 of gross profit against 222 of CAC, so the shop is 12 behind until a second order.

Right and wrong readings

  • Wrong: “3:1 is the norm for online stores.” Right: it is David Skok’s guideline for SaaS start-ups, restated in 2013: LTV above 3× CAC. In the example, the same customers give 4.3 on revenue and 1.5 on gross profit, so first ask which LTV a ratio uses.
  • Wrong: “An order that costs more in ads than it earns is always a loss.” Right: in the example, the first order is 12 behind, but 336 of lifetime gross profit covers 222 of CAC, provided the store’s order history confirms the 1.6 orders.

Sources