Many businesses focus only on how low their cost to acquire a new customer (CAC) is, but forget to look at how much revenue that customer will generate over the whole relationship (LTV). Understanding the LTV:CAC ratio is the key to knowing whether your business is growing sustainably or burning cash acquiring customers who don't pay off.
- LTV is the profit one customer generates for as long as they keep buying from you, while CAC is the total marketing cost per new customer.
- An LTV:CAC ratio of about 3:1 or higher is considered good. Below 1:1 means you lose money on every customer you acquire.
- Raise LTV by getting customers to buy again (LINE OA, email) and by increasing basket size.
How do you calculate Customer Lifetime Value (LTV)?
The basic LTV formula is average order value × purchase frequency per year × the number of years a customer is expected to keep buying (customer lifespan). For example, if a customer spends ฿500 per order on average, buys 4 times a year and stays for 3 years, their LTV is around ฿6,000, not just the ฿500 from their first purchase.
How do you calculate Customer Acquisition Cost (CAC)?
CAC is the total cost of acquiring one new customer, calculated by dividing your total ad spend over a period by the number of new customers gained in the same period. It should include all related costs, not just ad spend, but also sales commissions, marketing tools and the relevant labour costs.
What counts as a good LTV:CAC ratio?
The benchmark marketers use worldwide is 3:1, meaning each customer should generate at least three times what it cost to acquire them. If the ratio is below 1:1, the business is losing money on every new customer. On the other hand, a ratio above 5:1 may mean you are under-spending on ads and missing out on faster growth.
Using LTV:CAC to plan ad budgets for scaling
Once you know this ratio, you can work backwards to find the maximum CAC you can afford to acquire a new customer while staying profitable. Decisions to increase ad spend are then backed by numbers rather than guesswork. It also helps you decide whether to invest more in retention to raise LTV instead of focusing only on acquisition.
- Calculate LTV and CAC by customer segment rather than as one overall average, because each segment behaves differently
- 3:1 is the general benchmark, but adjust it for your industry and product margins
- The CAC payback period matters as much as the ratio: the faster you recover the cost, the healthier your cash flow
- Investing in retention, such as membership programmes or re-engagement, can sometimes deliver better returns than acquiring new customers
Summary
Sustainable scaling isn't about pushing ad spend as high as possible. It's about understanding whether each customer is worth what you paid to acquire them. The Markettung team analyses clients' LTV:CAC to plan ad budgets that genuinely grow the business without risking cash-flow problems.