Understanding CAC and Lifetime Value (LTV)

The Two Numbers That Define Your Business

Every business, regardless of size or industry, comes down to two numbers:

1. Customer Acquisition Cost (CAC): How much does it cost you to get a new customer?
2. Customer Lifetime Value (LTV): How much is that customer worth over their entire relationship with you?

If LTV is significantly higher than CAC, you have a healthy, growing business. If they are close together -- or worse, CAC is higher -- you are running on a treadmill, working hard but not building wealth.

Most small business owners have never calculated either number. After reading this guide, you will.

Calculating Customer Acquisition Cost (CAC)

The Basic Formula

CAC = Total Sales and Marketing Costs / Number of New Customers Acquired

Include ALL costs related to acquiring customers:

• Advertising spend (Google Ads, Facebook Ads, print ads)
• Marketing software (email platform, CRM, website hosting)
• Your time spent on sales and marketing (assign an hourly value)
• Sales staff compensation (if applicable)
• Referral rewards
• Vehicle branding (amortize over its lifespan)
• Networking and trade show costs
• Lead generation platform fees (Angi, HomeAdvisor, Thumbtack)

Example Calculation

Let us say you are a remodeling contractor with these monthly costs:

| Cost | Monthly Amount | |------|---------------| | Google Ads | $1,200 | | Mailchimp subscription | $30 | | Website hosting | $50 | | Referral rewards paid | $200 | | Your time on sales (20 hrs x $75/hr) | $1,500 | | Vehicle wrap (amortized: $3,600 / 36 months) | $100 | | Total | $3,080 |

If you acquired 8 new customers this month:

CAC = $3,080 / 8 = $385 per customer

CAC by Channel

The total CAC is useful, but CAC by channel is where the insights are. Calculate it separately for each marketing source:

| Channel | Monthly Spend | New Customers | CAC | |---------|--------------|---------------|-----| | Google Ads | $1,200 | 4 | $300 | | Referrals | $200 | 3 | $67 | | Vehicle branding | $100 | 1 | $100 |

This tells you where to allocate more budget (referrals at $67/customer) and where to optimize (Google Ads at $300/customer is fine for remodeling but would be high for lawn care).

What Is a Good CAC?

There is no universal benchmark because it depends on your industry and average job value. As a rule of thumb:

• CAC should be less than 10-15% of your average job value
• A $500 CAC is excellent if your average job is $10,000
• A $500 CAC is terrible if your average job is $800

Calculating Customer Lifetime Value (LTV)

The Basic Formula

LTV = Average Job Value x Average Number of Jobs Per Customer x Average Customer Lifespan (in years)

Understanding the Components

Average Job Value: Add up your total revenue for the past 12 months and divide by the number of jobs completed.

Average Number of Jobs Per Customer Per Year: Some businesses do one-time projects (roofing). Others have recurring work (HVAC maintenance, lawn care, cleaning). Be honest about your repeat rate.

Average Customer Lifespan: How long does a customer typically use your services? For recurring services, this could be 3-7 years. For project-based work, consider the total number of projects over a homeowner's tenure.

Example Calculations

Recurring Service Business (HVAC Maintenance):

• Average job value: $350
• Jobs per customer per year: 2 (spring and fall tune-ups)
• Average lifespan: 5 years
• LTV = $350 x 2 x 5 = $3,500

Project-Based Business (Kitchen Remodeler):

• Average job value: $25,000
• Jobs per customer: 1.5 (some customers do a second project)
• Average lifespan: 1 project cycle
• LTV = $25,000 x 1.5 = $37,500

Hybrid Business (General Contractor):

• Average job value: $5,000
• Jobs per customer over relationship: 3
• Average lifespan: 4 years
• LTV = $5,000 x 3 = $15,000

Do Not Forget Referral Value

The formulas above undercount LTV because they exclude the value of referrals. If a customer refers two friends who each spend $5,000, that original customer's effective LTV includes that additional $10,000.

To factor this in, multiply your LTV by a referral coefficient:

Adjusted LTV = LTV x (1 + Referral Rate x Average Referral Value / LTV)

If 30% of your customers refer at least one new customer:

Adjusted LTV = $15,000 x (1 + 0.30 x $5,000 / $15,000) = $15,000 x 1.10 = $16,500

The LTV:CAC Ratio

This is the metric that ties everything together.

LTV:CAC Ratio = Customer Lifetime Value / Customer Acquisition Cost

Benchmarks

| Ratio | What It Means | Action | |-------|---------------|--------| | Below 1:1 | Losing money on every customer | Cut marketing spend, fix pricing, or both | | 1:1 to 2:1 | Breaking even or slim margins | Optimize channels, reduce CAC, increase retention | | 3:1 | Healthy and sustainable | This is the target for most businesses | | 5:1+ | Very efficient | Consider investing more in growth | | 10:1+ | Potentially under-investing | You could grow faster with more marketing spend |

A 3:1 ratio means for every $1 you spend to acquire a customer, you get $3 back in lifetime revenue. That leaves room for cost of goods, overhead, and profit.

Using CAC and LTV to Make Decisions

Pricing Decisions

If your CAC is $400 and your average job is $2,000, your CAC represents 20% of revenue. That is high. You have two options:

1. Reduce CAC by optimizing marketing channels
2. Increase job value through pricing adjustments or upselling

Channel Allocation

Once you know CAC by channel, allocate budget proportionally to the channels with the best LTV:CAC ratio, not just the lowest CAC. A channel with a higher CAC might deliver customers who spend more and refer more.

Hiring Decisions

Should you hire a salesperson? If they cost $60,000/year and you expect them to close 100 new customers, that adds $600 to each customer's CAC. If your LTV is $5,000, the ratio is still 8:1. The hire makes financial sense.

Growth Planning

If your LTV:CAC ratio is 5:1 or higher, you can afford to spend more on marketing. Many business owners under-invest because they focus on the cost of marketing rather than the return.

Running the numbers might show that spending an extra $2,000/month on Google Ads would generate $10,000+ in additional lifetime revenue. That is not an expense -- that is an investment you should be making.

Improving Your LTV

Increase Average Job Value

• Offer premium tiers or packages
• Bundle related services
• Upsell maintenance agreements at job completion

Increase Purchase Frequency

• Implement annual maintenance programs
• Send seasonal reminders for recurring services
• Create a loyalty program with escalating benefits

Extend Customer Lifespan

• Follow up regularly with past customers
• Deliver exceptional service that prevents them from looking elsewhere
• Build personal relationships beyond the transaction

Increase Referral Rate

• Implement a formal referral program
• Ask for referrals at the point of highest satisfaction
• Make it easy for customers to share your information

Reducing Your CAC

Optimize High-Cost Channels

• Improve Google Ads targeting and ad copy to increase conversion rates
• Negotiate better rates with lead generation platforms
• A/B test landing pages to improve conversion rates

Invest in Low-Cost Channels

• Grow your organic search presence through local SEO
• Build a referral system (lowest CAC channel for most businesses)
• Leverage email marketing to convert and retain at minimal cost

Improve Sales Efficiency

• Follow up with leads faster (response time directly impacts close rates)
• Implement a CRM to prevent leads from falling through the cracks
• Train your team on consultative selling techniques

Tracking Over Time

Calculate CAC and LTV quarterly. Track the trend. You want to see:

• CAC decreasing or stable as you optimize
• LTV increasing as you build retention and referral systems
• LTV:CAC ratio improving over time

Plot these on a simple line chart. Share them with your team. These are the numbers that determine whether your business is building equity or just generating income. There is a massive difference.