Category: Marketing.

If you’re not new in the marketing world, you’ve probably heard about the LTV: CAC metric. Short for Lifetime Value: Customer Acquisition Cost, this metric is one of the key metrics that help you monitor your business. It allows you to track the total value of a customer and compare it to the acquisition cost, and it shows how effective your spending is – hence why it’s helpful.

However, it may seem complicated, and you may think that the formula will take ages to show you the results. If you know the basics, it will be easier, which is why this article will tell you what you need.

LTV: CAC – Understanding the Metric

So, as mentioned in the introduction, the LTV/CAC ratio compares a customer’s value over their lifetime to the price of acquiring them. In other words, LTV stands for “lifetime value”, while “CAC” stands for “customer acquisition cost”.

A higher ratio is preferred over a low one. Let’s say that, for example, a company has a ratio of less than 1.0. That means that the firm is destroying value. On the other hand, if it’s higher than 1.0, it may be creating value, but there’s still more analysis needed.

So to speak, a ratio higher than 3.0 is generally good, but it depends on the case.

Why is it Important?

Simply put, the LTV: CAC metric lets you estimate the lifetime value and acquisition cost of a customer. You may be wondering why it is important to your business, but you will realize that it can actually help it.

When you know the worth of a customer, you can start thinking about the amount of money you need to spend to attract them. You will also know the level of efficiency you need to be able to stay on top when it comes to this. Consequently, you can make decisions and relevant changes to improve your company’s performance.

How do You Calculate LTV?

LTV shows the amount of profit you receive from a customer during your whole relationship, that being from all revenue generating sales, not a single one.

The formula looks like this:

Gross margin (%) x Lifetime in Pay Periods Length x Revenue per Subscription Per Pay Period

How Do You Calculate CAC?

Now that you’re aware of the customer’s worth to your business, it’s time to estimate the price of a new customer to purchase a system.

So, the CAC is calculated like this:

What is the LTV/CAC Formula?

After finding out how much LTV and CAC are, it’s time to calculate the LTV/CAC, and the formula goes like the following:

Gross Margin % X (1 / Monthly Churn) x Average Monthly Subscription Revenue per Customer: Sales and Marketing Costs / New Customers Won

Final Thoughts

If you want to find out ways to attract customers and maintain a relationship with them, it’s important to calculate the LTV/CAC. It may seem a lot of work, but now that you know the basics and you’re aware of its importance, you should be able to do it.

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