This is a long article but for many business owners, this could be one of the most important things you will read. Take your time to understand these numbers, then apply the calculations to your own business. Improving cost per customer acquisition and customer lifetime value will directly impact your ability to increase cash-flow, giving you more options and greater freedom.
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Despite how fast our agency has grown over the last two years, I still try to meet every new client face-to-face before we start working together. It’s important to align the expectations that will determine the success, or failure, of the relationship.
In these conversations, most owners have similar feelings towards their past marketing experience – whether they were doing it themselves or with another agency:
- it feels like a black hole.
- it’s confusing and we don’t know which sales and marketing efforts matter the most.
- the marketing reports don’t seem to match up with sales reports.
- we pay the bill, run the ads and hope for the best.
- the total cost per customer acquisition always feels high, the leads don’t convert as quickly as they’d like, and they’re never sure if it’s worth it.
It’s like they’ve been marketing because they feel they have to. The fear-of-missing-out is too strong.
That was me, earlier in my career, while building my first company in 2013. Every pound of marketing cost felt like a paper cut. I told myself it was just the price of doing business — unavoidable, like rent or insurance. “Marketing” was just another expense on a report and I was hell-bent on reducing it.
This attitude towards marketing spend kept my business stuck for years, always looking at the immediate cost-to-return (ROI) and not the longer term value.
LTV to CAC Ratio Lightbulb
The light-bulb moment came when I stopped asking “what does this customer cost me?” and started asking “what is this customer worth to me?”
The moment I realised we weren’t “spending to get a sale” and were actually “investing to get a customer” – my view on marketing changed. My view on business models changed. It’s what led me to start this marketing agency and what led me to write this article; because I tell a version of this story to nearly every customer I meet.
Your view on marketing will change once you understand, and combine, two metrics: Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV).
Why Business Owners Struggle With Marketing Spend
Most owners understand the concept of customer acquisition cost. There are some nuances to it, which I’ll cover below, but the principle is obvious – the cost to acquire a new customer. On its own – it’s just another cost you’re trying to reduce, like any other business expense.
When you focus on customer acquisition cost, you end up chasing the cheapest clicks and the fastest wins. You cut spending when the return isn’t instant or obvious. You try short-lived marketing campaigns that rarely build anything lasting. Optimising for organic discovery (eg. Search Engine Optimisation) is hard to justify because you know it could take months before seeing any significant return – if there’s even a return at all.
It’s like buying the cheapest drill for a big construction project. If you only look at the price of the drill, you might feel clever saving money. But if the drill breaks after a few uses, what have you really saved?
Your customers work the same way. If you only look at the cost in relation to the first sale, you miss the whole picture: the potential lifetime value of acquiring a new customer.
Because once you acquire a new customer, you don’t pay to acquire them again.
LTV is the critical point most owners miss when determining whether their marketing efforts are generating a suitable return. If you take anything from this article – it’s understanding LTV.
What Is Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) is the average cost of winning a new customer.
The formula is simple:
CAC = Total Sales and Marketing Expense ÷ Total Customers Acquired – in a given time frame eg. monthly.
That’s the CAC calculation. But the important part isn’t the math – it’s what you include.
How To Calculate CAC
Everything you spend, across all marketing channels, specifically to get customers through the door:
- Ad spend
- Creative costs (design, video, copy)
- Marketing agency fees (yes, those count)
- Salaries for any sales people
- Any overhead costs directly tied to customer acquisition
If the expense disappears tomorrow and your leads stop, it belongs in CAC. Too many owners understate their marketing expenses, which makes their actual cost of sales look lower than it really is. That’s how you end up fooling yourself. Be honest and include all the costs.
Quick CAC Example
Let’s say you pay a marketing agency £1,000 a month to manage your Google Ads with an average Ad spend of £500 per month. You also have a Business Development Manager (BDM) on a £2,000 per month salary whose only job is to generate leads and convert sales.
That’s £3,500 per month in sales & marketing expenses. Then, if:
- The Ads generate 50 leads per month
- The BDM generates 20 leads per month
- The BDM has a 50% conversion rate – meaning for every 2 leads they convert 1 sale.
That’s 35 new customers from 70 leads. £3,500 in customer acquisition spend / 35 new customers.
Your Customer Acquisition Cost (CAC) = £100.
What Is Customer Lifetime Value (LTV)?
On the other side of the cac formula is Customer Lifetime Value (LTV). This is the total amount a customer spends, on your product or service, during the full lifetime of their relationship with your business. It includes:
- Their first purchase
- All repeat purchases
- Any subscription renewals
- Upsells or cross-sells
At first glance, many owners calculate LTV purely on revenue. But that can give you a false sense of security.
Should LTV Be Sales Revenue or Profit?
This question trips up a lot of owners. Here’s how we think about it:
- Revenue LTV is the easiest to calculate: eg. average purchase value × number of purchases. But it ignores costs and doesn’t give you a true sense of performance.
- Net Profit LTV goes too far the other way, subtracting fixed overhead like rent and salaries. Those costs don’t scale up or down with each new customer.
- The most useful measure is Gross Margin LTV (sometimes called Contribution LTV):
👉 Gross Margin LTV = Lifetime Revenue × Gross Margin %
This means you’re subtracting only the direct, variable costs of serving that customer — things like product costs, shipping, payment processing, or staff time tied directly to delivery.
It’s the right middle ground: not overly optimistic like pure revenue, and not overly strict like full net profit. It tells you what each customer really contributes toward covering overheads and generating bottom line profit.
If your operating costs stay steady, every improvement in your LTV:CAC ratio flows straight to the bottom line, meaning more cash.
Why the LTV:CAC Ratio Should Be Your Compass
Short answer: because a higher LTV:CAC ratio equals freedom. It gives you options. You start to feel like you own your business instead of your business owning you.
When you put Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV) together, you get the LTV:CAC ratio. This number is more than marketing maths – it’s the compass that shows whether your business is moving toward sustainable growth or drifting toward a cash flow crisis.
Why does it matter so much? Because it connects three realities every owner feels:
- Cash flow – The faster you earn back your customer acquisition spend, the more cash you have to pay staff, cover bills, reinvest, or take out for yourself.
- Margins – The higher your LTV relative to CAC, the more gross margin each customer gives you after acquisition — and that surplus flows straight toward your bottom line once overhead is covered.
- Growth options – A healthy ratio gives you the confidence to spend more on marketing, knowing every pound invested in new customers will multiply into future revenue. It gives you a certain level of predictability.
The Power of Improving LTV Metrics
The LTV:CAC ratio gives you a lens across multiple areas of your business. It provides you with multiple levers you can pull instead of purely focussing on the cost of acquiring a customer.
Often the most impactful lever you can pull, is improving your LTV. When you can increase the value of each customer relationship, everything changes:
- A customer who buys once barely often barely covers their acquisition cost.
- A customer who buys five times might generate 5x the margin, while their CAC stays the same.
- A customer who stays for years (eg. subscription products) can fund entire teams.
Practical resources to optimise LTV include:
- Focus on improving customer retention. What are you doing to incentivise customers to come back again and again? Even something as simple as an email marketing strategy can dramatically impact LTV.
- Look for “quick wins”. Often helping a customer with a quick-win makes them feel better about choosing your business. There is science behind this idea too. Quick wins build fast trust, validating their decision to work with you. They’re also more likely to refer your business to their friends. This increases LTV but also reduces longer-term CAC through word-of-mouth referrals.
- Build new products/services that encourage repeat purchases with subscriptions, bundles, or loyalty programs. A boiler installer that builds in subscription based servicing, or gassafe checks can take a £2,000 install and add another £1,000 in LTV.
- Raising average order value with upsells and cross-sells.
- Reducing churn rate by investing in customer success and user experience.
- Raise your prices! This is the easiest way to increase LTV. Constantly be improving the value you provide and raise your prices over time.
Every improvement in LTV strengthens your ratio without touching CAC — meaning more cash, stronger margins, and greater resilience.
What the Ratios Mean in Practice
- 1:1 – For every £1 you spend, you only get £1 back in gross margin. Once you factor in the operating costs of running the business, you’re losing money.
- 2:1 – You’re getting £2 back for every £1 spent. Better, but still thin. You may be profitable on paper, but cash flow will feel tight unless you recover that spend quickly.
- 3:1 – This is the benchmark most investors and operators look for as a minimum. Every £1 of CAC generates £3 in LTV. At this level, you cover acquisition and overhead, with enough left to reinvest in marketing and still deliver healthy net margins.
- 4:1 or higher – This is where the magic happens. It means customers are highly profitable relative to acquisition costs. At this point, the question becomes: can you increase marketing spend while keeping the ratio healthy? If yes, lean in, spend more, and grow faster. If not, enjoy the stronger cash flow and focus on improving operations and LTV.
Why “3:1” Is the Rule of Thumb
The “3:1” target isn’t magic — it’s a balance point. At this level, every £1 you spend to acquire a customer brings back £3 in gross margin over their lifetime. That usually means:
- Enough left over to cover fixed costs like rent, staff, and utilities,
- Enough surplus to reinvest in marketing and keep growing,
- Not so much that you’re being overly cautious and missing growth opportunities.
But numbers only come alive when you see how they work in practice.
Local Industry Examples
Take a look at how the ratio plays out for different kinds of local businesses. These are examples to illustrate the point:
- Café – spends £10 to acquire a customer. Each visit has £3.15 in gross margin. With 20 visits over three months, the customer’s LTV is £63. The ratio? 6.3:1. Payback is almost instant — CAC is covered inside the first month.
- Hair Salon – spends £35 to acquire a client. Each appointment produces £39 in margin. Six visits over 18 months gives an LTV of £234. The ratio? 6.7:1. CAC is almost repaid on the first visit.
- Heating Contractor – spends £90 to acquire a customer. A £300 job with 55% margin produces £165, plus some repeat work. LTV comes to about £202.50. The ratio? 2.25:1. CAC is covered on the first job, but there isn’t much cushion beyond that.
- Gym / Fitness Studio – spends £120 to acquire a new member. Each month contributes £40 in margin. If the average member stays 8 months, LTV is £320. The ratio? 2.7:1. CAC is paid back in about three months — and every extra month of retention pushes the ratio higher.
This shows why “3:1” is a useful benchmark. Some businesses (cafés, salons) naturally run well above it because customers repeat quickly. Others (gyms, trades) hover closer to 2–3:1 and need to focus on improving LTV through retention, upsells, or service plans.
The Payback Formula: Why Time Also Matters
But here’s the catch: the ratio only tells you how much. It doesn’t tell you when. That’s where the payback formula comes in.
Payback is simply the time it takes for the gross margin from a customer to cover what you spent to acquire them.
- A 4:1 ratio with an 18-month payback can leave you gasping for cash.
- A 3:1 ratio with a 75-day payback can feel great, because you can recycle spend again and again.
This is why business owners should track both:
- The ratio → Are customers profitable enough and are we improving our LTV:CAC ratio?
- The payback window → Do we have the cash flow to sustain growth while we wait and can we shorten the ROI timeframe?
Based on the scenarios above, you can see how the cafés and salons can recover their spend almost instantly, while gyms need a few months, and trades depend heavily on upsells, repeat work and lowering CAC through referrals.
The Big Picture
The LTV:CAC ratio tells you if customers are profitable. The payback period tells you if you can afford to wait for that profit.
- Improve lifetime value (better retention, higher average order value, more repeat purchases), and your ratio strengthens.
- Shorten payback (recover CAC faster), and your cash flow smooths out, giving you the fuel to grow.
Together, these two metrics give you clarity: not just whether marketing is “working,” but whether your business model is scalable.
👉 That’s why “3:1” is a rule of thumb, not a law. If cash comes back quickly, you can grow below it. If it takes longer, you’ll want to aim higher.
What matters most is knowing your numbers and making them work in the context of your business.
Real World Examples of LTV:CAC in Action
Mental Health Operator in Newcastle
Before we started working with this particular client, a local chain of mental health clinics across the North East, they had been running their own Google Ads. Monthly ad spend was around £800 per month, generating an average of 10 new customers per month. CAC= £80.
The average Gross Profit of a typical session was around £28 and customers averaged 5.6 sessions each. LTV = £156.80
When you put these numbers together, LTV:CAC was 1.96:1 (156.80/80).
The business owners were focussed on the initial return – ie. that they were spending £80 to generate £28, but once we helped them see that this wasn’t accurate – because the average customer was generating £156.80 across their lifetime – it became a clearer picture. This was better, but not good enough. To properly grow, they needed more customers with a stronger LTV:CAC ratio.
12 months later, it’s a different picture. The client has worked hard on improving their LTV – by increasing prices over time and working with therapists and patients to improve customer retention – meaning longer average session volume and stronger LTV.
With the improvements in LTV, they’re now spending significantly more in marketing. Working with a professional Ad Agency has allowed them to generate more lead volume, keeping their overall CAC within a profitable range.
Including Agency fees, their current marketing spend is around £2,500 per month, with their Ads now contributing 75 new sales per month (based on ~200 leads @ 37.5% conversion).
CAC has come down to £33.33, despite the additional agency cost.
The improvements in LTV have meant customers are averaging more sessions (9.5), with a higher Gross Profit percentage – driving LTV to £380 per customer over the past 12 months.
Improvements across Customer Acquisition Costs plus Life Time Value has improved their current LTV:CAC ratio to an impressive 11.4 with faster payback than ever before (0.83 sessions compared to 2.86 initially)
This has given them options and is allowing them to expand to newer markets, like Durham and Northumberland.
We have been working with Tyneside Marketing for over a year and have found them to be an excellent partner in helping us grow our business. We operate in a sensitive market with tight budgets, but they took the time to fully understand our business and got us on track to achieve our goals.
Growing LTV:CAC ratios, with faster payback times, is like pouring a can of petrol on a weak fire. It allows you to significantly scale up your business – or predictably increase the cash you can take from it.
Final Word
The biggest mindset shift you can make as a business owner is to stop treating marketing purely as an expense and start seeing it as an investment.
When you measure Customer Acquisition Cost against Customer Lifetime Value, you stop guessing. You know if you’re building something sustainable or just spinning your wheels. You can make better decisions.
The LTV:CAC ratio is more than a marketing KPI. It’s a financial compass for your company. It tells you when to spend more, when to optimise, and when you’re ready to scale.
We help all our customers with this – to make sure that our work is having a direct impact on their business goals. If you want to discuss this in more detail, please book a time in my calendar for a discussion. Completely free. We’d love to help.
FAQs
The below FAQ’s aim to address quick questions that may not have been addressed simply in the article.
What Is CAC?
CAC stands for Customer Acquisition Cost and is a metric used to show how much it costs your business to acquire a single customer.
What Is Good CAC / Good Customer Acquisition Cost
There’s no universal Good CAC. You need to consider it in the context of your own business, specifically as it related to your customer LTV and average payback time.
LTV:CAC of 3:1 is a good minimum that a lot of people use, but it’s far from perfect and is dependent on your specific business model. Good CAC for saas companies or a professional services business might be £1,000 because their average LTV is £5,000. But if their average LTV was £500 then paying £1,000 for a new customer is a terrible idea – unless it’s part of a longer term plan.
Should LTV be revenue or profit?
Use Gross Margin LTV for CAC decisions. That’s lifetime revenue minus variable costs. It gives you a fair picture of what each customer contributes.
Do marketing agency fees count in CAC?
Yes. If the spend is part of your customer acquisition strategies, it belongs in CAC. Agency fees, ad spend, and creative costs are all part of your sales and marketing expenses.
How do you calculate CAC?
Use the customer acquisition cost formula: divide your total sales and marketing expenses by the number of new customers acquired. Be honest about including all types of costs linked to acquisition.
