Growth is only good news if each customer eventually pays you back more than they cost to win. Three numbers tell you whether that is true: Customer Acquisition Cost (CAC), Lifetime Value (LTV) and CAC payback period. Learn to compute all three, read them together, and watch how they move over time. This is the difference between spending your way to a bigger business and spending your way to a faster failure.
Customer Acquisition Cost (CAC)
CAC is what it costs, on average, to win one new customer.
CAC = total sales and marketing spend in a period / new customers won in that same period.
Count everything: ad spend, agency and creative fees, the salaries of your sales and marketing people, tools, and acquisition discounts. Example: you spend ₹6,00,000 in a quarter and win 300 customers, so CAC is ₹2,000.
An India-specific detail: most marketing services carry 18% GST (advertising sits under SAC 998361, and digital or internet advertising under SAC 998365, both taxed at 18%). If you are GST registered and the spend is for business, that 18% is usually not a real cost, because you claim it back as Input Tax Credit under Section 16(2) of the CGST Act, provided you hold a valid tax invoice and the supplier has actually paid the tax. Ads bought directly from foreign platforms such as Google or Meta count as an import of services, taxed under the Reverse Charge Mechanism at 18% IGST: you self-assess and pay it in cash, then reclaim it as ITC in the same return. So build CAC on the cost net of recoverable GST, not the gross bill.
Lifetime Value (LTV)
LTV is the total value a customer brings over their whole relationship with you. The single most common mistake is calculating it on revenue. Use gross margin instead, because revenue you spend on serving the customer was never yours to keep.
LTV = (average revenue per customer per month x gross margin %) / monthly churn rate.
Example: average revenue is ₹1,000 per customer per month, gross margin is 70%, and 5% of customers churn each month. Monthly gross margin per customer is ₹700, so LTV is ₹700 / 0.05, which is ₹14,000.
CAC payback period
Payback tells you how many months it takes to earn back your CAC from a customer's gross margin. This is really a cash-flow question: until payback, that customer is still in the red.
Payback (months) = CAC / (monthly revenue per customer x gross margin %).
Using the numbers above: ₹2,000 / ₹700, which is roughly 2.9 months.
Reading the numbers together
No single metric is safe on its own. Read the LTV to CAC ratio alongside payback. In the example, ₹14,000 to ₹2,000 is a 7:1 ratio. A widely cited healthy minimum is 3:1, with strong companies often in the 4:1 to 6:1 range. Below 1:1 you lose money on every customer. A very high ratio like 10:1 is not always good news either: it can mean you are underspending on growth and leaving the market to competitors. For payback, under 12 months is commonly treated as healthy for subscription businesses, though recent benchmarks show medians stretching well beyond that as acquisition gets more expensive.
Read them as a trend, not a snapshot
A single month's figure can flatter or mislead you. Track CAC, LTV and payback month over month, and break them down by cohort (customers who joined in the same month) and by channel. Separate blended CAC from paid CAC so that free word-of-mouth signups do not hide a rising cost of paid acquisition. The pattern to fear is CAC creeping up while LTV drifts down, because it means each new rupee of growth is buying less. The pattern to trust is payback shortening and the LTV to CAC ratio holding as you scale spend. Also stress-test your churn assumption: LTV is extremely sensitive to it, so a small optimistic error there quietly inflates every other number.