LTV to CAC Ratio Calculator – Four Numbers, Three Common Mistakes
The LTV to CAC ratio asks one question of a paid social channel: over a customer's expected life, does the profit they produce exceed what it cost to win them? The arithmetic is a single division, LTV ÷ CAC. Almost every wrong answer comes from building one of those two numbers badly, so this calculator is opinionated about how each is assembled — and it prints the CAC payback period beside the ratio, because a ratio alone hides when the money actually arrives.
Gross margin belongs in the numerator
Lifetime value is gross-profit-based, never revenue-based. The formula is LTV = ARPU × gross margin × expected lifetime. Dropping the margin term is the single most common error in this calculation, and it is not a rounding issue: it overstates the ratio by exactly the inverse of the margin. At a 60% gross margin, a revenue-based LTV is 1.67× the real figure — easily enough to make a loss-making acquisition channel look comfortable.
Gross margin here means revenue minus the cost of delivering the service: hosting, payment processing, support, fulfilment, content licensing. It is not net margin, and it must not include the acquisition spend. That spend is the denominator; subtracting it in both places double-counts it. Only the margin, not the revenue, is ever available to repay what a customer cost.
What the constant-churn assumption buys, and what it costs
For a constant per-period churn rate c, expected lifetime is the mean of a geometric distribution — 1 ÷ c periods — which collapses LTV to ARPU × margin ÷ c. That is what the model buys you: a whole customer life from one number.
What it costs is accuracy. The formula assumes churn is identical in every period of a customer's life, and real cohorts almost never behave that way. Churn is typically front-loaded: heaviest in the first few periods, then lighter among the customers who survive them. The geometric mean leans heavily on a long thin tail, and front-loaded churn is precisely what cuts that tail off, so 1 ÷ c computed from an early-period rate runs long for most businesses. Treat it as what the model implies, not as a lifetime you measured. If you have cohort data, a contract term or a repeat-purchase estimate, the direct-lifetime mode takes it instead — which also makes the tool usable for e-commerce brands that have repeat-purchase behaviour rather than a churn rate at all.
Long modelled lifetimes raise a second problem: a dollar of gross profit collected in month 40 is not worth a dollar today. The optional discounted form, ARPU × margin ÷ (c + d), handles it. Note that d is a periodic rate on the same period as ARPU and churn — roughly 1% monthly for a 12% annual rate. It barely moves a short lifetime and moves a long one a great deal.
CAC is not CPA
CPA prices a conversion event; CAC prices an acquired customer. The two diverge as soon as one customer converts more than once — somebody who signs up and later converts again on a retargeting ad is two conversions but one customer, which makes CAC the larger figure. They coincide only when conversions and new customers run one to one.
CAC also carries a wider cost base. Media spend alone understates it and inflates the ratio, so the calculator itemises creative production, tooling, agency and influencer fees and allocated acquisition salaries alongside it, then shows how much of the total is not media. It also asks whether the denominator is paid-attributed customers or every new customer including organic: blended CAC is the lower figure and is not a measure of paid-channel efficiency.
Payback is a separate question
payback = CAC ÷ (ARPU × gross margin) periods. A ratio of 5:1 earned over four years, while the acquisition cost is paid up front, is a working-capital problem the ratio cannot show you — the money is real, it just arrives too late to fund the next cohort. Where payback runs longer than the modelled lifetime, the customer churns before repaying their own acquisition cost, and the tool says so in words.