Work out what a customer is worth over time, what they cost to win, and whether the two add up. Works for one-off sales, programmes and monthly memberships.
Customer lifetime value (LTV) is the total a typical customer pays you while they stay: average order × purchases a year × years, or monthly payment × months. Compare margin-based LTV with customer acquisition cost (CAC). A ratio of 3:1 or better is a commonly cited sign of a healthy business.
Who this is for: Coaches, consultants and founders who want to know what a customer is worth and how much they can afford to spend winning one.
Customer lifetime value, often shortened to LTV or CLV, is the total a typical customer pays you over the whole time they stay. The simple formula is:
If a client spends £250 twice a year and stays for three years, their LTV is £250 × 2 × 3 = £1,500 in revenue.
If you know churn rather than lifespan, you can work lifespan out. Average lifespan in months is roughly 1 ÷ monthly churn. Lose 5% of members a month and the average member stays about 20 months.
Revenue LTV is the headline number, but margin-based LTV is the honest one. Multiply by your gross margin to get what a customer is worth after the cost of serving them. At a 70% margin, that £1,500 customer is worth £1,050. Use the margin figure when you compare it with acquisition cost.
CAC is what it costs, on average, to win one new customer: total marketing and sales spend ÷ new customers, over the same period.
The mistake most people make is counting only ad spend. A fairer CAC includes ads, marketing tools, freelancers or agency fees, and a fair cost for the time you or your team spend on sales calls. Spend £6,000 in a quarter, win 20 new clients, and your CAC is £300.
Use a period of at least a few months. A single month can swing wildly, especially if your sales take weeks to close.
The LTV to CAC ratio is margin-based LTV divided by CAC. It answers one question: is each customer worth more than they cost to win? A commonly cited rule of thumb is 3:1. It is a rough guide, not a law, and it suits businesses with repeat revenue best.
| LTV to CAC | What it usually means |
|---|---|
| Under 1:1 | Each customer costs more to win than they ever bring in. |
| 1:1 to 3:1 | Profitable on paper, thin once overheads and your time are paid for. |
| 3:1 or more | Commonly cited as healthy. Room to grow and to spend more on marketing. |
| Well above 5:1 | Often a sign you could spend more to grow faster. |
Payback period is how many months it takes a customer's margin to cover what you spent winning them: CAC ÷ monthly margin per customer. If a customer costs £300 to win and brings in £70 of margin a month, you are paid back in just over 4 months.
Payback matters because cash runs out before ratios do. A great ratio with an 18 month payback can still leave a small business short of money. For coaches and service businesses, under 6 months is comfortable for most. If payback is longer than customers usually stay, you never get the money back.
Most businesses stop talking to customers after the first sale. That is usually the cheapest money left on the table, because the customer already trusts you.
And if the ratio is low because CAC is high, the fix is usually in the funnel: more of your leads turning into customers. Our ROAS calculator shows whether your ads alone are paying their way.
For one-off purchases, LTV is average order value × purchases per year × years a customer stays. For monthly payments, it is the monthly payment × months a customer stays. Multiply by your gross margin for margin-based LTV.
A commonly cited rule of thumb is 3:1 or better, meaning a customer is worth three times what they cost to win. Under 1:1 you lose money on each customer. Between 1:1 and 3:1 is usually thin once overheads are paid.
Add up all your marketing and sales spend over a period, including ads, tools, freelancers and sales time, then divide by the number of new customers you won in that same period.
Use both, for different jobs. Revenue LTV shows what a customer pays you in total. Margin-based LTV shows what they are worth after the cost of serving them, and that is the one to compare with CAC.
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