You're calculating CAC wrong. It's not just ad spend divided by customers. Here's the real formula that includes all costs.

The Simple Formula vs. The Real Formula

Most people use the simple formula. It's wrong:

Simple Formula (Wrong)

CAC = Ad Spend / Customers Acquired

Example: $10,000 / 100 customers = $100 CAC

Problem: Ignores salaries, tools, overhead, and other costs

Real Formula (Correct)

CAC = (Ad Spend + Salaries + Tools + Overhead) / Customers Acquired

Example: ($10,000 + $20,000 + $2,000 + $3,000) / 100 = $350 CAC

Reality: Your real CAC is 3.5x higher than you thought

Including Salaries and Tools in CAC

Here's what to include:

What Counts as Marketing Cost

Ad spend: Google Ads, Facebook, LinkedIn, etc.
Salaries: Marketing team salaries (prorated)
Tools: CRM, email platform, analytics, etc.
Content: Design, copywriting, video production
Overhead: Office space, utilities (marketing %)
Agency fees: If using agencies

How to Calculate

Add all marketing costs for the period (month/quarter)
Divide by customers acquired in that period
That's your real CAC

Calculating Lifetime Value (LTV)

LTV is how much a customer is worth:

The Formula

LTV = Average Revenue Per Customer × Gross Margin % × Average Customer Lifespan

Example: $1,000 × 70% × 3 years = $2,100 LTV

What to Include

Initial purchase: First sale value
Upsells: Additional products/services
Renewals: Subscription renewals
Expansion: Account growth
Referrals: Value of referrals they bring

The Golden Ratio: LTV:CAC of 3:1

The target ratio:

Why 3:1?

1:1 = Break even (not sustainable)
2:1 = Profitable but tight
3:1 = Healthy (room for growth and profit)
4:1+ = Excellent (can scale aggressively)

What If You're Below 3:1?

Lower CAC (improve conversion, optimize ads)
Increase LTV (upsells, retention, expansion)
Or both

How to Lower CAC by Improving Conversion

Better conversion = Lower CAC:

The Math

Current: $100 CPL, 10% conversion = $1,000 CAC
Improve conversion to 20% = $500 CAC
Same ad spend, double the customers

How to Improve Conversion

Better landing pages
Faster response time
Better lead quality
Improved sales process

Conclusion

Calculate CAC correctly by including all costs (salaries, tools, overhead), not just ad spend. Calculate LTV including all revenue streams. Target a 3:1 LTV:CAC ratio. Lower CAC by improving conversion rates. The result? Accurate metrics and better business decisions.