CAC, LTV, ROMI and ROAS: Key Marketing Metrics Explained
Basics4 minInnovialabs editorial team
In short
CAC is what it costs to win a customer, LTV is the profit they bring over their lifetime, ROAS is revenue per dollar of ads and ROMI is profit per dollar of marketing. Ads pay off when LTV clearly exceeds CAC and ROMI is positive after margin.
The short answer
Each of the four metrics answers a different question:
| Metric | Question | Formula |
|---|---|---|
| CAC (Customer Acquisition Cost) | What does it cost to acquire one customer? | Acquisition costs / Number of new customers |
| LTV (Lifetime Value) | How much profit will a customer bring over time? | Average order value × Purchases per lifetime × Gross margin |
| ROAS (Return on Ad Spend) | How much revenue did ads generate? | Revenue from ads / Ad spend × 100% |
| ROMI (Return on Marketing Investment) | How much profit did marketing generate beyond its cost? | (Gross profit from marketing − Marketing costs) / Marketing costs × 100% |
The key difference: ROAS counts revenue, ROMI counts profit. A high ROAS does not mean you are making money.
A worked example
The numbers are illustrative, to show the mechanics. An online store in one month:
- spent $2,000 on ads;
- spent another $1,000 on sales staff handling leads;
- got 50 new customers;
- average first order value is $80;
- gross margin (gross profit as a share of revenue) is 40%.
CAC = ($2,000 + $1,000) / 50 = $60 per customer.
ROAS = (50 × $80) / $2,000 × 100% = $4,000 / $2,000 × 100% = 200%.
Sounds good: every ad dollar returned two. Now let's count profit.
ROMI on the first purchase = ($4,000 × 40% − $2,000) / $2,000 × 100% = ($1,600 − $2,000) / $2,000 × 100% = −20%.
On the first purchase alone, ads lose money. Now account for repeat customers. Suppose the store's data shows an average customer makes 5 purchases over their lifetime.
LTV = $80 × 5 × 40% = $160 of gross profit per customer.
ROMI based on LTV = (50 × $160 − $2,000) / $2,000 × 100% = ($8,000 − $2,000) / $2,000 × 100% = 300%.
LTV / CAC = $160 / $60 ≈ 2.7.
The takeaway: ads pay off, but not immediately, only through repeat purchases. So the business needs working capital to wait for the return, and it needs retention work: if customers stop coming back, the whole model turns negative.
A useful derivative: break-even ROAS
For the first purchase to at least cover ad spend:
Minimum ROAS = 1 / Gross margin × 100%
At a 40% margin, that is 250%. Anything below means a loss on the first sale. This simple check stops you from celebrating a "200% ROAS".
How the metrics work together
- CAC without LTV says nothing: whether $60 per customer is a lot depends on what the customer brings in.
- ROAS is handy for day-to-day campaign management: comparing ads, placements and audiences.
- ROMI answers the business question: are we making money on marketing?
- LTV / CAC shows the health of the whole model. LTV must clearly exceed CAC, because rent, salaries and taxes are paid out of the difference.
- CAC payback period is how many months it takes a customer to repay their acquisition cost. The shorter it is, the less cash is locked up in growth.
Common mistakes
- Calculating LTV from revenue instead of profit. $400 of revenue at a 40% margin is $160, not $400.
- Leaving costs out of CAC: salaries, tools, agency fees, first-order discounts.
- Making LTV up. Calculate it from real cohorts: take customers acquired in one month and see how much they bought in the following months.
- Mixing channels. A blended CAC can hide that one channel is profitable while another burns budget.
- Trusting only last-click attribution when calculating ROAS by channel.