The LTV:CAC ratio is one of the most widely used measures of how profitable a customer acquisition strategy is. It is made up of two parts:

• Lifetime Value (LTV) - the total profit generated by a given customer over the full lifetime of their relationship with the business.

• Customer Acquisition Cost (CAC) - the initial cost of acquiring each new customer.

The formula for calculating LTV to CAC is straightforward: simply divide your LTV by your CAC. This gives you a value that indicates how much each customer adds to the business compared to how much it costs to obtain them.

• If this value is greater than 1, it means the revenue generated by a customer over time is greater than the cost to acquire them. This is (usually) good news!

• Conversely, if this value is lower than 1, it means the cost to acquire the customer is higher than the revenue they will bring in. This unfortunately shows that acquiring new customers is unprofitable.

Understanding the LTV:CAC ratio has many potential advantages for marketers, including:

• Assessing profitability: Evaluating the profitability of customer acquisition efforts is crucial to ensure that marketing strategy is adding to the bottom line.

• Measuring efficiency: By comparing the LTV:CAC ratio to industry benchmarks, and across channels, the relative performance of acquisition strategies can be determined, and the most efficient channels identified.

• Improved decision-making: The ratio can help guide data-driven decisions on which strategies and channels to prioritize to maximize the return on each marketing dollar spent.

• Long-term planning: Considering the full customer lifetime aids planning for long-term growth, highlighting the importance of customer retention and loyalty.

Performance on this ratio can vary quite a bit across industries, but the generally accepted benchmark for a good LTV:CAC ratio is 3:1. Here is why:

• Profitability: the 3:1 ratio ensures each customer adds a comfortable margin, allowing room for investment in other parts of the business whilst retaining an acceptable proportion of profit.
• Return on investment: this level of performance is a good indicator that the business is pulling the right levers and investing in the right channels to use sales and marketing resources efficiently.
• Sustainable growth: a healthy LTV:CAC ratio is an indicator that a business is not only acquiring new customers at a good cost but is then effectively forging relationships with these customers to ensure continued revenue over time – critical for healthy growth.

If your LTV:CAC ratio falls below this benchmark you may find that, after the costs associated with providing your product or service, the profit each customer brings to the business is small. You should take action to find more profitable customers using the most cost-effective channels. A higher ratio can be a good thing, indicating that lucrative customers are being acquired. However, if your ratio is reaching 5:1 or above, this means you likely have scope to invest more aggressively in customer acquisition, bringing in a wider audience and increasing your business’s overall revenue.

To improve LTV, you’ll want to increase the number of orders each customer makes and raise the average profit per order. To bring CAC down, you should aim to optimize spend on your most effective channels and improve conversion. More specific levers are shown in figure 1. For more in-depth advice on optimizing these metrics, check out our LTV and CAC articles.

As a single metric to use as a measure of the effectiveness of your marketing program, LTV:CAC is a great place to start. It provides a quick diagnostic on the overall health of your acquisition approach. To get to the root cause of any underperformance, you will need in-depth analysis of LTV and CAC levers individually. This can be a complex mix of internal and external factors, but having a guiding benchmark for what good looks like will help set your business up for customer acquisition success.