Customer Lifetime Value & CAC Calculator

Why lifetime value changes your ad budget

The ROAS Calculator asks whether one order pays for the ad that won it. That is the safe question for a shop whose customers buy once. If customers come back, the first order can break even or even lose a little, and the repeat orders bring the profit. Lifetime value (LTV) tells you how much a customer is worth over that whole relationship, and so how much you can afford to pay to win one.

The formulas

• •Revenue per customer = average order value × orders per year × years they keep buying.
• •Profit per customer (LTV) = revenue per customer × gross margin.
• •Max CAC to break even = profit per customer. Pay more than this to acquire a customer and you lose money on them, even counting repeat orders.
• •LTV : CAC = profit per customer ÷ what you pay to acquire one.
• •Orders to pay back CAC = CAC ÷ gross profit per order, rounded up.

Worked example

A coffee shop online sells bags at an average order of 60 with a 40% gross margin. Customers order 3 times a year and keep buying for about 2 years. Ads cost 48 per new customer.

• •Revenue per customer = 60 × 3 × 2 = 360
• •Profit per customer = 360 × 40% = 144
• •Max CAC = 144
• •LTV : CAC = 144 ÷ 48 = 3 : 1
• •Each order makes 24 of gross profit, so it takes 2 orders to pay back the 48.

The first order (24 of profit) doesn't cover the 48 it cost. Judged on ROAS for that order alone, the campaign looks like a loss; across the customer's lifetime it returns three times the cost.

Getting the inputs right

• •Use your own order history. Average order value and orders per year come straight from your store's reports. Look at customers who first bought at least a year ago so the number isn't dragged down by people who only just arrived.
• •Be cautious with years. It is the easiest number to inflate. If you have been selling for 18 months, you don't yet know whether customers stay for five years.
• •Use gross margin, not markup. Margin is profit as a share of the price. The Margin Calculator converts between the two.
• •CAC is total marketing spend ÷ new customers in the same period, not spend ÷ all orders.

What ratio to aim for

At 1 : 1 the gross profit from a customer only repays what it cost to acquire them, with nothing left for rent, wages or software. You need a ratio above 1 to cover those fixed costs. How far above depends on your overheads and on how long you can wait for the payback, so there is no single right number. The payback figure matters as much as the ratio: a 3 : 1 ratio that takes two years to pay back ties up cash that a small shop may not have.

Limits of this calculator

It treats every customer as the average customer, and ignores refunds, discounts, inflation and the time value of money. Use it to set a ceiling on what you pay for a customer, then check real cohorts in your store data as they age.