LTV to CAC ratio and payback calculator

How it works

Every figure is gross profit: what is left of revenue after the cost of goods, shipping and payment fees. Revenue would flatter every number here, because the cost of the goods never comes back.

Average order value

Revenue divided by the number of orders.

Gross margin

The share of an order you keep after product cost, shipping and payment fees. Use the margin on orders, not a company margin after overheads.

Orders in the first 12 months

How many orders an average new customer places in their first year, the first order included.

r, the share who buy again

Of the customers who bought in one year, the share who buy in the next. After two years, r × r of the original customers are still buying, and so on.

Y, the years beyond the first

How many later years to count, from 0 to 5. Each one repeats the first year's orders, order value and margin for the customers still buying. With no repeat share, only the first 12 months count.

CAC

Cost to acquire a new customer: acquisition spend divided by the new customers it brought, over the same period.

Payback

The months until a customer's gross profit covers their CAC. When the first year does not cover it, the calculator names the later year whose running total does, or says the years counted never reach it.

What it assumes

• Gross profit, not revenue.
• Orders are spread evenly across the first year, for the months to payback.
• No discounting: a euro in year three counts the same as a euro today.
• Customers still buying in later years order as often as in their first year. If returning customers order less often, the later years here run high.

Related glossary terms: Customer lifetime value, Customer acquisition cost, Purchase frequency, Repeat purchase rate, Profit margin.

A worked example

Example inputs, round numbers, not any real store's: an average order of €60.00, a 45% gross margin, 2 orders in the first 12 months, 40% of customers buying again each following year, 2 years counted beyond the first, and a CAC of €45.00.

1. First-year gross profit: €60.00 × 45% × 2 = €54.00.
2. Later years: year 2 is €54.00 × 40% = €21.60. Year 3 is €54.00 × 40% × 40% = €8.64.
3. LTV over 3 years: €54.00 + €21.60 + €8.64 = €84.24.
4. LTV to CAC: €84.24 ÷ €45.00 = 1.87x.
5. Payback: €54.00 ÷ 12 = €4.50 of gross profit a month, and €45.00 ÷ €4.50 = 10.0 months.
6. Highest CAC that pays back within 12 months: €54.00, the first year's gross profit.

Change only the CAC. At €70.00, the first year's €54.00 falls short; with year 2 the running total reaches €75.60, so it pays back during year 2. At €90.00, even the €84.24 counted over 3 years falls short, so it does not pay back within the years counted.

The ratio is only as good as the CAC

Frequently asked questions

• What is a good LTV to CAC ratio?

  There is no single right number for every store, and this calculator does not pretend there is one. The ratio compares the gross profit a customer brings over the years you count with what it cost to win them. Under 1, the customer has not paid for themselves within those years. Above 1, how much room you need depends on your overheads (gross profit does not cover them), your cash and how sure you are of the repeat share. The ratio also depends on the horizon: count more years and it can only rise or stay the same.
• Should LTV be revenue or gross profit?

  Gross profit. Revenue includes the cost of goods, shipping and payment fees, which you pay out again, so an LTV in revenue set against CAC makes every customer look more valuable than they are. This calculator works in gross profit throughout: order value times gross margin.
• How do I work out my CAC?

  Take what you spent to win new customers in a period and divide it by the new customers from the same period. Count new customers from your store's own orders, not from ad platform conversions. Each platform claims conversions it shares with the others, so a CAC built on their numbers comes out too low.
• How is the payback period calculated?

  Payback in months is the CAC divided by one month of first-year gross profit: CAC ÷ (first-year gross profit ÷ 12). That assumes orders are spread evenly across the first year. The first order lands on day one, so when one order covers most of the CAC, the real payback is quicker than shown; when repeat orders come late in the year, it is slower. Past 12 months, the calculator names the year in which the running total covers the CAC, or says it does not within the years counted.
• What if customers buy less often after their first year?

  Then the later years here run high. The model gives every customer who is still buying the same number of orders a year as in their first year. If returning customers order less often, lower the repeat share to reflect it, or read the LTV as an upper bound.
• Why is there no discount rate?

  To keep the arithmetic visible. A euro of gross profit in year three counts the same as a euro today. Discounting would lower the later years; if your finance team uses a discount rate, apply it to the year-by-year figures the calculator shows.