Why LTV is the ceiling on CAC
LTV sets what you can pay to win a customer. The common health check is the LTV:CAC ratio, with roughly 3:1 a durable target and the cost recovered inside about 12 months. A channel with a punishing CAC can still be worth it if LTV is high, and a cheap channel can be a trap if it brings low-value customers.
Use margin, not revenue
Base LTV on gross profit, not top-line revenue, or you will overstate what you can spend. For subscription businesses it is average revenue per account times gross margin times average lifetime; for ecommerce it leans on AOV, purchase frequency, and retention.
Common questions
How do you calculate LTV?
A simple form is average purchase value times purchase frequency times customer lifespan, then multiplied by gross margin to express it as profit rather than revenue.
What is a good LTV:CAC ratio?
Around 3:1 is a common healthy benchmark, with acquisition cost recovered within about 12 months. Much higher can mean underinvesting in growth; much lower is usually unsustainable.