How should I calculate LTV?

Start with average order value times expected orders over 12 months, then multiply by contribution margin percent. A customer buying three times at $60 AOV with 45 percent contribution margin has a 12-month contribution LTV of $81. Use this number against CAC, not the gross revenue figure. Gross LTV inflates the ratio misleadingly.

How long should my CAC payback be?

Most DTC brands target 6-month payback or faster. Anything over 12 months needs strong cash reserves because you are funding CAC longer than you collect. Subscription brands can afford longer paybacks (up to 18 months) because revenue is more predictable. Fashion and impulse categories need payback inside 3 months.

Does LTV include future purchases I project or only what I've seen?

Use historical LTV from a cohort that has matured (at least 12 months of data). Projected LTV is fine for planning but dangerous for ratio analysis. If you only have 6 months of data, report 6-month LTV and mark it clearly. Do not multiply by 2 to guess 12-month LTV: repeat rates do not scale linearly.

Should I include organic customers in CAC?

Use blended CAC (all marketing spend divided by all new customers) for this ratio. Mixing paid LTV with paid-only CAC overstates efficiency because organic customers usually convert and retain better. Blended CAC gives you the honest denominator that matches the blended customers in your LTV calculation.

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LTV:CAC Ratio Calculator

LTV:CAC is the one ratio that tells you whether your business compounds or bleeds. Under 1x you are losing money. Above 3x you can grow. Here is where you actually land.

LTV : CAC = Lifetime Value ÷ Customer Acquisition Cost

Lifetime value (LTV) ($)

Customer acquisition cost (CAC) ($)

Average order value (optional) ($)

From MagicFit

Healthy unit economics start with lower CAC

Improving LTV is slow. Lowering CAC is fast. MagicFit helps you ship ad creative that converts on the first watch, so the denominator of this ratio keeps dropping.

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How to use this LTV:CAC Ratio Calculator

LTV:CAC is the cleanest health check in ecommerce. Above 3x, you can scale. Below 1x, you cannot survive. Between 1x and 3x, you are alive but not growing. Every decision about ad spend, retention investment, and channel expansion should look at this ratio first.

Calculate LTV honestly. The most common mistake is using revenue per customer instead of contribution per customer. A $200 revenue LTV at 40 percent contribution margin is actually $80 of LTV to compare against CAC. Use contribution LTV (sometimes called CM-LTV) for any ratio work. The revenue number inflates the picture and leads to overspending.

Decide which time window to use. 12-month LTV is the DTC standard. Longer windows (24 or 36 months) flatter the ratio but reward you for cash you have not collected yet. If you are under a year old as a brand, use 6-month LTV and annualize carefully. Report the time window alongside the ratio: a 3x ratio on 12-month LTV is a very different business from 3x on 36-month LTV.

Frequently Asked Questions

3:1 is the canonical target for DTC. Below 1:1 you are losing money. Between 1:1 and 3:1 you are surviving but not compounding. Above 3:1 you can invest in growth. Above 5:1 usually signals you are underspending on acquisition and could scale. These are guidelines, not laws. Context matters.

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