The LTV:CAC ratio tells you whether buying customers is a good investment. It divides the profit a customer generates over their relationship with you by the cost of winning them. It is the bridge between ad metrics such as CPA and the economics of the whole business.
How to calculate it
- Work out customer lifetime value over a fixed horizon, such as 12 months. Use contribution margin, not revenue: what's left after product cost, shipping, fees and returns.
- Work out CAC for the same group of customers: acquisition spend ÷ new customers.
- Divide LTV by CAC.
Using revenue instead of margin is the most common error. It can make a ratio of 1.2 look like 4.
Worked example
Example: customers acquired in January, tracked for 12 months.
| Line | Value |
|---|---|
| Average revenue per customer, 12 months | ₹4,500 |
| Contribution margin rate | 40% |
| LTV (margin) | ₹1,800 |
| CAC | ₹600 |
| LTV:CAC | 3.0 |
| Months to earn back CAC | About 4 |
The same customers measured on revenue would show 4,500 ÷ 600 = 7.5, which would wildly overstate how much you can afford to spend.
What is a good LTV:CAC ratio?
A ratio of about 3 is a widely used rule of thumb in subscription and e-commerce businesses. It is a convention, not a law. What matters for you:
| Ratio | What it usually means |
|---|---|
| Below 1 | Each customer loses money over their lifetime |
| 1 to 2 | Thin, little room for overheads |
| Around 3 | Healthy for many brands |
| Well above 5 | Possibly under-investing in growth |
Also check the payback period: how long until a customer's margin covers their CAC. A ratio of 3 that takes 18 months to pay back can still strain cash flow.
How to use it with Meta ads
- Set acquisition targets. If LTV is ₹1,800 and you want a ratio of 3, you can afford a CAC of about ₹600, even if the first order alone doesn't cover it.
- Compare channels and campaigns. Customers from different campaigns can have different repeat rates.
- Feed value back to Meta. A value-based lookalike built from high-LTV customers helps Meta find more people like your best buyers.
Plug your numbers into the LTV:CAC calculator to find the CAC your business can afford.
Frequently asked questions
What is a good LTV to CAC ratio?
A ratio of about 3 is a common rule of thumb, meaning each customer returns three times their acquisition cost in contribution margin. Below 1 loses money. Very high ratios can mean you're under-investing in growth. Your margins and cash position should set your own target.
Should LTV use revenue or profit?
Use contribution margin, meaning revenue minus product cost, shipping, fees and returns. Revenue-based LTV inflates the ratio and can make an unprofitable acquisition strategy look healthy.
How do I calculate LTV:CAC for a new brand?
Use a short horizon, such as 90 days or 6 months, built from the customers you actually have, and update it as cohorts age. Avoid assuming repeat rates you haven't seen yet.
How does LTV:CAC affect my Meta ads budget?
It sets the most you can pay for a new customer. If a customer is worth ₹1,800 in margin and you want a ratio of 3, your target CAC is about ₹600. That can justify a first-order ROAS below break-even, as long as repeat purchases really happen.
