What is the difference between CAC, LTV and ROI, and why do they matter?

• CAC (Customer Acquisition Cost) — total sales and marketing spend divided by new customers acquired in the period. Include salaries and tools, not just media spend, or the number is flattering and useless.
• LTV (Customer Lifetime Value) — the total gross profit expected from a customer over the relationship. A workable form is average order value × purchase frequency × expected lifespan × gross margin. Use margin, not revenue — LTV on revenue makes unprofitable customers look valuable.
• ROI — (return minus investment) divided by investment, expressed as a percentage. ROAS (return on ad spend) is the narrower advertising version, measuring revenue per unit of media spend only.

Why they matter together: the LTV:CAC ratio is the health metric. A widely used benchmark is 3:1 — below that the business struggles to fund growth, and much above it may mean you are underinvesting in acquisition and leaving growth on the table.

Payback period matters as much as the ratio: how many months until a customer repays their acquisition cost. A great LTV:CAC ratio with a two-year payback is a cash flow problem regardless of how good the economics look eventually.

Note: The nuance interviewers look for is that CAC should be measured by channel and segment, not as a blended average. A blended CAC hides the fact that one channel is profitable and another is subsidising it.