LTV:CAC ratio: what it measures and how to use it

The short answer

The LTV:CAC ratio is customer lifetime value divided by customer acquisition cost. It compares what one customer is worth over their relationship with the business with what you spent to acquire them. Write it as a multiple or a ratio, such as 4x or 4:1. Before reading that as profit, check whether LTV means revenue or the amount left after direct costs.

LTV:CAC ratio = lifetime value per customer ÷ acquisition cost per new customer

The formulas behind the ratio

Stripe gives the formula as LTV divided by CAC in its guide to CAC payback. These are business calculations, rather than a Meta or Google campaign column. You need to define both inputs before comparing accounts.

For CAC, Stripe's acquisition cost guide uses total sales and marketing costs divided by new customers acquired. Its examples are for SaaS, but the distinction between new buyers and repeat orders matters for ecommerce too. An order from someone who bought before doesn't add another new customer to the denominator.

CAC = acquisition sales and marketing costs ÷ new paying customers acquired

Include the costs you agreed to measure: paid media, acquisition creative, agency work and the relevant share of sales and marketing salaries or tools. State how shared costs are allocated. If you use ad spend alone, label the result ad-spend-only CAC so the client can distinguish it from a fully costed figure.

For LTV, Stripe's customer lifetime value guide gives a simple transaction-based formula. To keep the units consistent, use purchase frequency per year with lifespan in years, or purchase frequency per month with lifespan in months.

Revenue LTV = average order value × purchases per period × customer lifespan in periods

That estimates revenue. For an acquisition decision, you also need what those orders leave after costs. Deduct refunds from revenue and use a stated direct-cost definition. Keep acquisition cost out of this contribution figure before dividing by CAC, otherwise you charge it against the calculation twice.

Contribution LTV = expected lifetime net revenue per customer minus the direct costs included in your definition, before acquisition costs

Stripe's lifetime value page discusses both simple revenue formulas and gross margin. That is a reason to label the numerator, rather than assuming every report uses the same version of LTV.

An illustrative example

Illustrative example only. All figures below are made up for teaching, not a benchmark, customer result or Thexly price.

An ecommerce brand spends €12,000 on acquisition sales and marketing and acquires 200 new paying customers in a month. Its CAC is €12,000 ÷ 200 = €60.

For this example, the brand estimates that each acquired customer will place three orders over their relationship, averaging €80 per order after discounts and refunds. Revenue LTV is €80 × 3 = €240. The revenue LTV:CAC ratio is €240 ÷ €60 = 4:1.

Now include direct costs. Across those three orders, product, fulfilment and payment fees total an illustrative €144 per customer. Contribution before acquisition is €240 minus €144 = €96. The contribution LTV:CAC ratio is €96 ÷ €60 = 1.6:1.

After the €60 acquisition cost, €36 remains per customer before overhead and any costs left outside this example. The 4:1 revenue ratio alone would not tell the client that. Nor does either ratio say when the second or third order arrives.

What counts as a good LTV:CAC ratio?

Start with the costs and cash timing, rather than a universal target. A revenue ratio above 1:1 only says lifetime revenue exceeds acquisition cost. Products still cost money to supply. Even a contribution ratio above 1:1 leaves overhead and any excluded costs to cover.

If your ratio improves, check what changed. Did acquisition cost fall, did observed repeat purchasing improve, or did someone extend the assumed lifespan? The last change can improve a forecast without adding a payment.

Ask finance to agree the cost basis and the amount the business needs left after acquisition. Then inspect whether the cohort reaches that amount within a time the business can fund. Keep those assumptions next to the ratio in the client report. This page uses no universal benchmark or spend-more rule.

Compare customers with the same time to buy again

A cohort is a group of customers who first bought in the same period. Stripe's lifetime value guide describes grouping buyers by first-purchase month or quarter and measuring their revenue and retention over time.

Compare cohorts at the same age. Last year's buyers have had longer to place repeat orders than buyers acquired last month. A fair observed comparison might follow each group for its first six months, with the horizon written beside the result. Call that six-month observed value, rather than pretending it is a complete lifetime.

An opened r/FPandA discussion makes the related segmentation point: "You’ll want to look at LTV to CAC by segment, or sales engine." The post discusses software finance, so its suggested targets aren't ecommerce benchmarks. The useful part for an agency is separating groups whose acquisition costs and repeat buying differ.

Keep observed and forecast value apart. Put payments received to date in one column and projected future purchases in another. If the forecast drives the result, show the lifespan and repeat-purchase assumptions that the client needs to believe.

Check payback alongside lifetime value

LTV:CAC measures value relative to acquisition cost. Payback asks how long it takes to recover that cost. Stripe treats these as separate measures in its CAC payback guide.

For a business with steady monthly contribution, its simplified formula is acquisition cost divided by monthly profit per customer. Ecommerce repeat orders can arrive unevenly, so inspect the cohort's cumulative contribution after each month instead. Find when that contribution covers its acquisition cost, using the same costs throughout.

A promised lifetime return doesn't pay this month's bills. Before increasing an acquisition budget, check both the expected contribution left after acquisition and how long the brand waits to receive it.

A check for the next client report

1. Choose a first-purchase cohort and an observation horizon. Compare groups at the same age.

2. Divide the acquisition costs assigned to that cohort by its new paying customers. Record the cost categories and allocation method.

3. Calculate net revenue per acquired customer over that horizon, then subtract the direct costs in the agreed definition. Use every acquired customer in the denominator, including those who never bought again.

4. Divide contribution per customer by CAC. Keep any forecast purchases separate from payments already received.

5. Show when cumulative contribution covers CAC. Explain whether a change in the ratio came from cost, repeat buying, margin or a changed forecast.

Bring acquisition spend and other costs from your own records. For a separate revenue check, the platform vs payment gap tool compares platform claims with payments. It does not calculate lifetime value, identify new buyers or work out a cohort's CAC.

Where Thexly fits

For agencies working with ecommerce brands on Stripe checkout, Thexly matches payments to the campaign visits that led to them. It shows which campaigns produced the payments. That's a revenue check beside your analysis, not a lifetime value forecast or a fully costed acquisition calculation.

You still need customer history to distinguish new buyers, finance records for costs and a stated horizon for repeat purchases. Keep those jobs separate from checking the payments. For a shorter-term revenue measure, see true ROAS.

Which goes into your client report today: lifetime revenue, contribution, or a forecast of purchases still to come?