CAC/LTV ratio : Calculation, Formula and it's importance for startups & scaleups

CAC and LTV are two important metrics that every business should track, and the relation between them is key to understanding how you grow.

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CAC is the amount of money you spend to acquire a new customer, while LTV is the total value of all the purchases a customer makes over their lifetime.

To get a clear picture of your business's health, it's important to track both metrics and calculate your CAC/LTV ratio. This ratio will tell you how much money you can afford to spend on acquiring new customers, and whether or not your current customer base is profitable.

There are a few ways to reduce your CAC, such as improving your marketing efforts or streamlining your sales process. To increase your LTV, you can focus on providing more value to your customers through loyalty programs, upsells, and cross-sells.

No matter what your CAC/LTV ratio is, tracking both metrics is essential for understanding the health of your business and making informed decisions about where to allocate your resources.

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CAC/LTV ratio – what it is and what does it mean for your business

As a startup, you’re constantly being asked to invest in new initiatives and grow your top line. But with limited resources, you can’t just go out and acquire new customers indiscriminately – you need to be strategic about how you spend your acquisition budget.

This is where the CAC/LTV ratio comes in.

CAC, or customer acquisition cost, is the amount of money you spend on acquiring a new customer. This includes all marketing and sales expenses, from advertising to salaries to commission.

Lifetime value (LTV) is the total value of all the purchases a customer makes over their lifetime. This takes into account not only the initial purchase, but also any upgrades, cross-sells, or upsells they may make.

CAC/LTV ratio is therefore the correlation between these two metrics.

How to calculate CAC/LTV ratio

There are two ways to calculate your CAC/LTV ratio:

The first way is to take your total marketing and sales expenses for a period of time (say, one year) and divide it by the number of new customers acquired during that time. This will give you your CAC. Then, take your LTV and divide it by your CAC. The result is your CAC/LTV ratio.

For example, let’s say you spend $100,000 on marketing and sales in one year, and acquire 200 new customers as a result. Your CAC would be $500 ($100,000 divided by 200). If each of those customers has an LTV of $1,000, your CAC/LTV ratio would be 2 (1,000 divided by 500).

The second way to calculate your CAC/LTV ratio is to take your total marketing and sales expenses for a period of time (say, one year) and divide it by the number of new customers acquired during that time. This will give you your CAC. Then, take your LTV and divide it by your CAC. The result is your CAC/LTV ratio.

For example, let’s say you spend $100,000 on marketing and sales in one year, and acquire 200 new customers as a result. Your CAC would be $500 ($100,000 divided by 200). If each of those customers has an LTV of $1,000, your CAC/LTV ratio would be 2 (1,000 divided by 500).

The good indication of profitability in a scaleup – 3:1

There is no magic number for what a good CAC/LTV ratio is – it depends on your business model and your specific industry. In general, though, a ratio of 3:1 or higher is considered healthy. This means that for every dollar you spend on acquisition, you're making at least three dollars in return. Of course, the higher your CAC/LTV ratio, the better. A ratio of 5:1 or 10:1 is even better, as it means you're generating a significant return on your investment. If your CAC/LTV ratio is below 3:1, it means you're not generating enough revenue from your customer base to cover the costs of acquisition. This is often indicative of a problem with either your marketing or your sales process – or both.

To improve your CAC/LTV ratio, you need to either reduce your CAC or increase your LTV. Reducing your CAC can be done by improving your marketing efforts, such as increasing your conversion rate or reducing your cost per lead. Alternatively, you can streamline your sales process to make it more efficient. Increasing your LTV can be done by selling additional products or services to your existing customer base, or by increasing the frequency or value of their purchases.

Factors can affect your CAC/LTV ratio

There are a number of factors that can affect your CAC/LTV ratio.

For example, if you're selling a high-priced product or service, your LTV is going to be higher than if you're selling a low-priced product or service. Similarly, if your customers are likely to make repeat purchases, your LTV is going to be higher than if they're only going to make a single purchase.

Another factor that can affect your CAC/LTV ratio is the lifetime of your customer relationships. If you have long-term customers who continue to do business with you for years, your LTV is going to be higher than if your customers only stick around for a few months.

Finally, the source of your customers can also impact your CAC/LTV ratio. If you're acquiring customers through word-of-mouth or referrals, your CAC is going to be lower than if you're using paid advertising to acquire customers.

Things you can do to improve your CAC/LTV ratio

If you want to improve your CAC/LTV ratio, you need to either reduce your CAC or increase your LTV. Reducing your CAC can be done by improving your marketing efforts, such as increasing your conversion rate or reducing your cost per lead.

Alternatively, you can streamline your sales process to make it more efficient. Increasing your LTV can be done by selling additional products or services to your existing customer base, or by increasing the frequency or value of their purchases.

You can also improve your CAC/LTV ratio by focusing on other areas of your business, such as customer acquisition or product development. By doing this, you can offset the impact of a low CAC/LTV ratio and still grow your business.

graph on dahsboard visualizing the cac/ltv ratio now and in the future using aim from ark

With AIM, there is a new better, and more exact way to figuring out your relation between CAC/LTV.

This is how most companies are tracking their CAC/LTV ratios.

At ArK, we create new ways to understand and finance your tech company.

Our analytics product AIM allows you to connect your current analytics stack to it, and through all your current data not only track CAC/LTV, but also forecast how it will develop into the future.

Common questions on CAC/LTV ratio

What is CAC and how do you calculate it?

CAC is the total amount of money that you spend on acquiring new customers. This can include advertising, marketing, sales, and any other customer acquisition costs. To calculate your CAC, simply divide your total customer acquisition costs by the number of new customers that you've acquired. For example, if you spent $1,000 on advertising and you acquired 10 new customers, your CAC would be $100.

What is LTV and how do you calculate it?

LTV is the lifetime value of your customer relationships. This includes all the revenue that you generate from a customer over the course of their relationship with your company. To calculate your LTV, simply divide your total revenue by the number of customers that you have. For example, if you have 100 customers and your total revenue is $10,000, your LTV would be $100.

Why is CAC/LTV ratio important?

The CAC/LTV ratio is important because it allows you to track the health of your company and determine whether or not your current marketing efforts are effective. If your CAC is high and your LTV is low, then you may need to rethink your marketing strategy. Keep in mind that the CAC/LTV ratio will vary depending on your industry and the type of product or service you offer. However, tracking this metric is a valuable way to measure the success of your business over time.

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