Customer acquisition cost (CAC) is how much you spend to win one new customer, and customer lifetime value (LTV) is the gross profit that customer brings you over the whole relationship. To calculate CAC, divide your total marketing and sales spend for a period by the number of new customers in that period. To estimate LTV, multiply average order value by gross margin and by the number of orders a typical customer makes. A healthy small business usually wants LTV to be comfortably higher than CAC; many businesses aim for about three times or more.
- CAC tells you what growth costs. LTV tells you what growth is worth.
- Use gross profit, not revenue, when you calculate LTV.
- If LTV is not clearly higher than CAC, more ad spend will grow losses, not profits.
- You can improve the ratio from both sides: cheaper acquisition and better retention.
- Get a growth plan built on your numbers from the free AI Business Growth Consultant.
The shop that grew itself broke
Imagine an online shop selling phone accessories. Sales double in three months thanks to Facebook ads. The owner is thrilled, hires two people and orders more stock. Six months later, the bank balance is lower than when the growth started.
What happened? Each new customer cost about 450 taka in ads. The average order was 900 taka, but after product cost, packaging, delivery and payment fees, only about 300 taka of profit was left. And most customers bought only once. Every “successful” sale lost around 150 taka.
Two numbers would have shown this in week one: what it costs to get a customer, and what that customer is worth. That is all unit economics really means.
The key numbers, in plain words
| Metric | Formula | What it tells you |
|---|---|---|
| Average order value (AOV) | Revenue / number of orders | How much a typical order brings in |
| Gross margin | (Revenue – cost of goods) / revenue | How much of each sale you keep before overheads |
| Purchase frequency | Orders / unique customers (per year) | How often a customer buys |
| Customer lifetime | Average number of years a customer keeps buying | How long the relationship lasts |
| CAC | Marketing + sales spend / new customers | What one new customer costs you |
| LTV | AOV x gross margin x orders per year x years | Profit one customer brings over time |
A worked example
LTV = 1,200 x 0.40 x 3 x 2 = 2,880 taka of gross profit per customer.
Last month the business spent 60,000 taka on ads, boosted posts and a part-time social media helper, and gained 100 new customers. CAC = 60,000 / 100 = 600 taka.
LTV to CAC ratio = 2,880 / 600 = 4.8. Healthy. This business can afford to spend more on growth, as long as the numbers hold.
How to calculate your own numbers
- Choose a periodThe last 3, 6 or 12 months. Longer periods smooth out seasonal swings.
- Add up acquisition costsAds, boosted posts, influencer fees, marketplace promotion, and any staff time spent on marketing and sales.
- Count new customersOnly first-time buyers in that period.
- Calculate CACCosts divided by new customers.
- Find AOV, margin and frequencyFrom your order history and supplier costs.
- Estimate customer lifetimeIf you are new, use a cautious guess, such as one year, and update it as data builds.
- Calculate LTV and the ratioThen repeat every quarter.
How to improve your ratio
Useful guides for each lever: fix ads that don’t convert, price your products, and customer retention strategies.
Mistakes that hide the truth
- Using revenue instead of gross profit for LTV, which makes every customer look more valuable than they are.
- Counting repeat buyers as new customers, which makes CAC look cheaper.
- Ignoring delivery, packaging, payment fees and returns in your margin.
- Using one great month to judge the whole year.
- Scaling ad spend before checking that CAC stays stable at higher budgets.
Plan growth you can afford
Once you know your CAC and LTV, you know how much you can afford to spend to grow. Use our ad budget guide to set spend levels, and put your numbers into the free AI Business Growth Consultant for a growth plan that fits them.
Sources
- Harvard Business Review: The Value of Keeping the Right Customers
- U.S. Small Business Administration: Understand your finances and grow your business
Frequently asked questions
How do I calculate customer acquisition cost?
Divide your total marketing and sales spend for a period by the number of new customers you gained in that period. For example, 60,000 taka spent and 100 new customers gives a CAC of 600 taka.
How do I calculate customer lifetime value?
A simple version is average order value multiplied by gross margin, orders per year and the number of years a customer stays. Use gross profit, not revenue.
What is a good LTV to CAC ratio?
Many businesses aim for about 3 to 1 or higher. Below 1 to 1 means you lose money on each customer. Very high ratios can mean you are underinvesting in growth.
What costs should be included in CAC?
Ad spend, boosted posts, influencer and agency fees, marketplace promotion fees, and the cost of staff time spent on marketing and sales.
How can I reduce my customer acquisition cost?
Improve ad creative and landing pages, encourage referrals and reviews, use free channels such as Google Business Profile, and target the customers most likely to buy.
Answer a few questions about your business and get a practical growth plan you can start this week.
Guides for this tool
Guide · 5 min readHow to Do a SWOT Analysis for a Small Business (With Example)
Guide · 5 min readHow to Get More Customers for a Local Business: 7 Proven Ways
Guide · 5 min readHow to Price Your Product or Service: A Simple Guide for Small Businesses
Guide · 5 min readCustomer Retention Strategies: 10 Ways to Keep Customers Coming BackWant a tool, website or app like this for your business?
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