How to Calculate Ad Budget: CAC, LTV & ROI

How much should you spend on ads to grow profitably? Use a simple model: CAC, LTV, payback and ROAS. Below are formulas, input checklist and a realistic numeric example.

What we measure (and why)

• CAC — customer acquisition cost.
• LTV — gross margin value over the customer’s lifetime.
• Payback — months to break even.
• ROAS / tROAS — revenue (or margin) from ads divided by ad spend.

Core formulas

“CAC = Ad spend / New customers”

“LTV (subscription) ≈ ARPU × Gross margin × Avg lifetime (months)”

“LTV (transactional) ≈ AOV × Purchase frequency × Margin × Time horizon”

“LTV/CAC — target ≥ 3:1 (higher for aggressive growth)”

“Payback (months) ≈ CAC / (ARPU × Margin)”

“Break-even ROAS ≈ 1 / Margin”

Top-down vs bottom-up budgeting

1. Top-down (from growth goal): need N customers → budget = N × target CAC.
2. Bottom-up (from channel metrics): Clients = Clicks × CR(click→lead) × CR(lead→sale); then CAC = Spend / Clients.

Mini calculator: inputs

• CPC & CTR by channel (search, social, remarketing).
• CR click→lead and CR lead→sale.
• ARPU/AOV and gross margin.
• Time horizon: payback window (1–12 mo) and LTV window (12–24 mo).
• Target # of new customers or revenue/margin target.

Numeric example (B2B services)

Assume CPC = $1.2, CR click→lead = 3%, CR lead→sale = 20%.

• Clicks per customer: 1 / (0.03 × 0.2) ≈ 166.7.
• Ad cost: 166.7 × $1.2 ≈ $200 → expected paid CAC.
• ARPU = $150/mo, margin = 60% → monthly margin = $90.
• Payback: $200 / $90 ≈ 2.2 months.
• Avg lifetime 10 mo → LTV ≈ $150 × 0.6 × 10 = $900. LTV/CAC = 4.5 — strong.

Channel allocation

• Search (high intent): usually best CAC, limited volume.
• Social (demand gen): higher CAC, scalable reach.
• Remarketing: low CAC, limited ceiling.
• Branded search: cheapest — protect your brand demand.
• 70/20/10 rule: 70% proven, 20% scale, 10% tests.

Blended vs Paid CAC & attribution

• Paid CAC — ads only. Blended CAC — total marketing / customers (includes organic/brand).
• Track both: Paid for tactical decisions, Blended for management view.
• Attribution: last-click undervalues upper-funnel; maintain a summary view across models.

Hidden costs & budget leaks

• Creative production, LP split-tests, tooling (trackers/heatmaps).
• Learning phase and segment tests (don’t expect perfect CAC in week 1).
• Weak landing CR multiplies CAC — fix CR before scaling spend.
• Poor lead qualification — cheap leads without sales: tighten scoring & handoff.

Guardrails & targets

• LTV/CAC ≥ 3:1; 4–5:1 for faster growth.
• Payback: SaaS 3–6 mo; services aim for ≤ 3 mo if possible.
• tROAS: anchor to break-even (= 1/margin) and add safety premium.

Writing a simple media plan

1. Pick a goal: N customers/mo or monthly margin target.
2. Pull realistic CPC/CR per channel (history or benchmarks).
3. Compute CAC by channel; add 10–20% test buffer.
4. Budget = N × target CAC (or derive from tROAS).
5. Milestones: weeks 1–2 (learning), 3–4 (stabilize), month 2 (scale).

Wrap-up

Keep it simple: estimate CAC bottom-up, validate against LTV and payback, reserve a test bucket, and enforce funnel discipline (landing CR, lead scoring, attribution). Then ad spend becomes a lever, not a cost.