Andrew RadosevichCalculating CAC
Formula: Total sales and marketing cost ÷ Number of new customers acquired (in the same period). Include: ad spend, content costs, sales salaries/commissions, tools, and events. Be honest here. Most businesses undercount by excluding sales time. Calculate monthly and by channel. You'll likely discover that some channels are profitable and others are burning cash, but you won't know which until you measure.
Calculating LTV
Simple formula: Average revenue per customer × Average customer lifespan (in months or years). Better formula: (Average revenue per customer × Gross margin %) × Average lifespan. For subscription/retainer businesses, include expansion revenue and factor in churn. For project businesses, include repeat purchase rate. The number doesn't have to be precise, directionally correct is enough to make better decisions.
The 3:1 Rule and When to Break It
LTV:CAC of 3:1 is the standard benchmark: you earn $3 for every $1 spent acquiring a customer. Below 1:1, you're losing money on every customer. Between 1:1 and 3:1, you're growing but may not be sustainable. Above 5:1, you might be under-investing in growth. Context matters: longer-cycle B2B businesses can tolerate lower ratios if contracts are large and retention is high.
Practical Improvement Levers
Reduce CAC: improve targeting (tighter ICP), increase conversion rates (better sales process), reduce cycle time (faster close), shift to lower-cost channels (referrals, content). Increase LTV: improve retention, add upsell/cross-sell paths, increase prices where value supports it, reduce delivery costs (better processes = better margins). The fastest lever is usually retention, keeping customers longer costs almost nothing and directly increases LTV.
Common questions
What's a good CAC for professional services?
Highly variable, but for B2B professional services: $500–$5,000 per client is common. The key isn't the absolute number, it's the ratio to LTV. A $5,000 CAC is fine if your average client is worth $50,000.
How often should I review unit economics?
Monthly at minimum. Include CAC and LTV (or proxies like average deal size and retention rate) in your monthly financial review. Quarterly, do a deeper analysis by channel and segment.
My business is too early to calculate LTV. What do I do?
Use what you have: average deal size × repeat rate (even if it's an estimate). If you only have 12 months of data, use 12-month customer value. The discipline of measuring matters more than precision, and you'll refine over time.