The LTV to CAC Ratio: Definition, Calculation and Examples

Understanding your Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC) is essential for any business that wants to achieve sustainable growth and profitability. While these two metrics provide insights into how much a customer is worth and how much it costs to acquire them, the real power lies in analyzing their ratio (LTV:CAC).

This ratio helps businesses determine whether their customer acquisition efforts are cost-effective and if they’re investing in long-term profitability or simply burning through cash.

In this article, we’ll break down what the LTV:CAC ratio is, why it matters, how to calculate it, and how to leverage it to drive better business decisions. Whether you’re running an eCommerce store, a SaaS business, or any other subscription-based model, mastering this ratio will help you scale efficiently and maximize profitability.

What is the LTV to CAC Ratio?

The LTV to CAC ratio shows how much you can expect from a new customer compared to what it costs to get one. To find your ratio, divide your customer lifetime value (LTV) by your customer acquisition cost (CAC).

Checking your LTV to CAC ratio helps you see if you spend your sales, marketing, and customer retention money wisely. It also gives you an idea of how valuable your startup is in the long run. Plus, it lets you know if you’re attractive to potential investors.

This ratio answers questions like:

How good are your sales and marketing efforts?

How much does it cost to get new customers, and is that cost worth what you expect to earn from them over time?

How to Calculate LTV to CAC Ratio?

To calculate the ratio, use this formula:

LTV: CAC Ratio = LTV/CAC

Why Monitor the LTV: CAC Ratio 

In the past, companies set limits for how much they’d spend on acquiring customers by considering the average cost for each new customer and looking at their average profit margin. 

But things are changing and we need to be smarter about it. 

Instead of just focusing on spending, marketing managers should think about using their money more wisely.

When you factor LTV into your acquisition plans, everything changes. 

You start asking different questions, like, “How much can we afford to spend on marketing to get new customers?” It means forgetting about spending the least and considering spending more in order to earn more.

What you realize is that spending more money can actually mean spending it in a smarter way.

Understanding LTV and CAC

LTV, or Customer Lifetime Value (CLV), is all about recognizing the long-term worth of your customers. 

So, when tracking LTV you have to move on from thinking about the immediate sales they bring in, and instead consider the total revenue they generate over their entire relationship with your company. 

The most straightforward LTV formula is to subtract the cost of that customer’s acquisition and retention from the total revenue he generates.

LTV = Total Customer Revenue – (Acquisition + Retention) Costs  

However, those costs also include factors like how often they buy from you, how much they spend each time, and how long they stay loyal to your brand.

So, a more accurate formula would be:

Screenshot from The CLV Revolution Book, by Valentin Radu

On the other hand, CAC reflects the investment you make to bring in new customers. 

This includes expenses on marketing campaigns, sales efforts, and any other costs directly related to acquiring new customers. 

The issue with CAC is that marketing manners only look at their Ad spent, without taking into account the big picture, or the long-term actions which led to a certain sum of money. 

Because of this, they end up with a skewed number which doesn’t necessarily reflect reality. 

To that end, to effectively calculate your CAC, you must first add up your expenses:

• on media, 
• marketing tools, 
• wages for marketing personnel, 
• agency fees, 
• and overhead costs. 

Then, divide the total by the number of new customers acquired during the specified period.

CAC =
All costs associated with Acquisition – The number of new customers acquired

When accurately calculating CAC, you can understand how efficiently you’re spending your resources to attract customers.

What’s interesting is how LTV and CAC work hand in hand. 

When you understand the lifetime value of your customers, you can make smarter decisions about how much you’re willing to invest in acquiring them. 

It’s about finding a balance between spending enough to attract quality customers and not overspending to the point where it hurts your bottom line.

For example, imagine you operate a subscription-based fitness app. 

Acquiring a particular customer for this service incurred a significant cost, let’s say $85. However, after two months, the revenue generated from this customer amounts to only $66, leaving you approximately $20 short of breaking even.

Fortunately, you identify this challenge early on and intensify your efforts to retain customers. Implementing an email campaign, you encourage this existing subscriber to renew his subscriptions.

Your persistence pays off when the customer responds to your retention email 35 days after the initial purchase. 

They not only renew their subscription but continue to make repeat purchases. With five orders in total, the LTV: CAC ratio surges, delivering a margin of $2.12 for every dollar spent acquiring this customer.

As you can see, monitoring these metrics helps you fine-tune your marketing strategies, improve customer retention efforts, and ultimately, boost your business’s profitability.

In a nutshell, you make sure that every last dollar you spend on acquisition positively impacts your company’s growth and success.

What is a Good LTV: CAC Ratio?

An LTV: CAC ratio of 3 or higher is considered favorable for business health. However, the number isn’t set in stone, as it will greatly vary from Industry to Industry. 

For example, in the real estate industry, retention (consequently the LTV) is naturally low – how many houses does the average person buy in their lifetime? 

On the other hand, a supplement company should see high retention and LLV, seeing how people usually restock on supplements monthly. And yet, since the competition is also fierce, the CAC should also be higher. 

Let’s explore another scenario: comparing early-stage startups to established companies. 

Early-stage startups often start on their journey with a great ambition for growth. 

Their primary focus revolves around acquiring customers to validate their product-market fit.

However, limited resources and a lack of established processes can pose challenges in achieving an optimal LTV to CAC ratio. 

Despite the issues, these startups are driven by innovation and a hunger to carve their niche in the market.

Conversely, established companies operate within a framework of efficiency and experience. 

With refined operations and a deeper understanding of their customer base, they can navigate the intricate balance between acquisition costs and customer lifetime value more effectively. 

Diversified revenue streams and a focus on customer retention empower these companies to maximize LTV and fortify their market position.

For startups, both LTV and CAC may fluctuate as these ventures experiment with different strategies and pivot in response to market feedback. 

It’s a journey marked by resilience, adaptability, and a relentless pursuit of growth.

Established companies, on the other hand, stand on the shoulders of their past successes. 

They leverage data-driven insights and strategic foresight to sustainably expand their market presence. By prioritizing customer retention and diversifying revenue streams, they grow their LTV to CAC ratio and lay the foundation for enduring prosperity.

In essence, the CLV to CAC ratio is really shaped by the challenges, wins, and the commitment to delivering value in the business landscape.

The healthiest idea at this point is seeing how your peers are doing. 

Industry Benchmarks

Here’s an analysis of LTV-to-CAC ratio benchmarks across 29 industries. 

The process was conducted by the SEO-focused company FirstPageSage and involved assessing the average LTV and CAC for each industry spanning a three-year period, followed by calculating the LTV:CAC ratio.

It’s important to note that the data compiled in the table spans from 2019 to 2024.

The majority, 68%, of the data originated from organic marketing channels, while 74% stemmed from B2B firms. 

Additionally, their client base tends to comprise midsized and larger enterprises. 

It’s worth mentioning that earlier-stage businesses typically allocate more resources to customer acquisition, resulting in lower LTV:CAC ratios.

Factors Affecting the LTV to CAC Ratio

Since we’ve already warned you about the fluctuating nature of the ratio, it’s time we look at some key factors that impact the LTV to CAC ratio.

Marketing Efficiency and Strategies

Effective marketing strategies are crucial to optimizing the LTV to CAC ratio. After all, ad spend will always influence your CAC the most. 

You need to identify the most efficient channels for customer acquisition and invest resources accordingly. 

For example, content marketing, email campaigns, and social media engagement can drive organic growth and lower acquisition costs compared to traditional paid advertising. 

You’ll want to leverage data analytics and A/B testing, to refine your marketing tactics and enhance the overall efficiency of their campaigns.

Product Pricing and Monetization Strategies

Companies offering premium products or services may attract customers with higher lifetime value, offsetting the acquisition costs. 

Additionally, subscription-based models or tiered pricing structures can encourage customer retention and increase the overall lifetime value of clients. 

It’s important you align customer expectations and market trends, to optimize your LTV to CAC ratio and drive sustainable growth.

Customer Retention and Churn Rates

Unfortunately, high churn rates will significantly impact the LTV and hurt the returns on acquisition investments. 

Implementing efficient customer retention strategies, such as personalized communications, loyalty programs, and exceptional customer service, can mitigate churn and increase customer lifetime value.

After all, the era of acquisition is over. 

Businesses that prioritize retention efforts, maximize the return on their acquisition investments and improve the overall LTV to CAC ratio in the long-term.

Impact of Business Scale and Growth Stage

Finally, the growth stage also influences the ratio – as we’ve seen in our earlier example. 

Early-stage startups may experience higher acquisition costs as they invest in building brand awareness and acquiring initial customers. 

However, as they mature and scale, they can leverage economies of scale and operational efficiencies to lower acquisition costs and increase customer lifetime value.

Additionally, expanding into new markets or diversifying product offerings can drive incremental revenue and create a better overall LTV to CAC ratio.

Strategies to Optimize the LTV to CAC Ratio

As with virtually anything in this world, the LTV: CAC ratio is also in your hands – you can impact it. 

Whether directly, or through company-wide initiatives, here are a series of good practices that can help you generate more value from your customers in the long-term.

Reduce CAC with Sustainable Methods

In the early stages, paid ads can provide quick results and boost brand awareness. 

However, escalating ad costs can inflate acquisition expenses over time. 

To counter this, explore sustainable approaches like launching affiliate programs, implementing customer referral initiatives, and investing in search engine optimization (SEO). 

These methods can help lower acquisition costs while fostering long-term growth prospects.

Focus on Retention

While social media channels are effective for acquiring new customers, building an owned subscriber list through email and SMS is crucial. 

These channels offer direct access to your audience without the limitations of borrowed platforms. 

As we already stated earlier – prioritizing retention efforts and leveraging post-purchase marketing strategies, such as one-click upsells and cross-sells, leads to better LTV and drives repeat purchases.

Segment and Analyze Customer Data

Segmenting customers based on profitability and calculating the LTV:CAC ratio for each cohort provides valuable insights into the effectiveness of your marketing efforts. 

Identify high-value customer segments and allocate resources accordingly to optimize marketing spend and maximize returns.

Data-Driven Decision Making

Leverage data and analytics to identify areas for improvement and capitalize on successes. 

Analyze factors influencing LTV, such as referral program performance, post-purchase marketing effectiveness, customer experience, and channel mix. 

More often than not, data-driven decisions lead to better marketing strategies, improved customer satisfaction, and sustainable growth.

Increase the Average Order Value (AOV)

Boosting the average order value is a powerful way to elevate the overall lifetime value of your customers. 

Encourage customers to spend more by implementing upselling and cross-selling techniques. 

Offer bundled packages or complementary products at checkout to entice customers to add more items to their cart. 

By increasing the AOV, you can maximize the revenue generated from each customer acquisition, thereby improving the LTV:CAC ratio.

Invest in Referral Programs

Referral programs are a cost-effective way to acquire new customers while leveraging the loyalty and advocacy of existing ones. 

Encourage satisfied customers to refer their friends and family by offering incentives such as discounts, exclusive access, or rewards points. 

Referred customers tend to have higher retention rates and lower acquisition costs compared to non-referred ones, making referral programs a valuable tool for optimizing the LTV:CAC ratio. 

Note – before leveraging the power of word-of-mouth marketing, track your NPS – the more Promoters you have, the better your chances are.

Interpreting of the Ratio Values

The number you’ll get from the above formula is your ratio. But, what does it mean?

Well, if LTV equals CAC (1:1) you’re in a scenario where you’re breaking even – you spend as much as you earn. 

While breaking even may seem like a neutral outcome, you’ll only achieve growth if the LTV surpasses CAC.

To improve the ratio, focus on improving the retention strategies. 

You can try implementing loyalty programs, personalized customer experiences, and proactive customer support.

On the other hand, if the LTV is lower than CAC (e.g., 1:1.25), it means the cost of acquiring customers exceeds their lifetime value. 

Unfortunately, if you find yourself in this situation, you may face challenges in achieving profitability and sustainability.

In this situation, you have to prioritize reducing customer acquisition costs while simultaneously boosting the lifetime value of customers. 

Strategies such as refining target audience segmentation, optimizing marketing channels, and creating better product offerings can help align LTV with CAC and improve your overall performance.

Now, let’s move on to happier scenarios. 

You might find out that your LTV is higher than CAC (e.g., 2:1 – 4:1).

This is considered a favorable scenario, indicating you can expect healthy returns on your acquisition investments.

Finally, when LTV is much higher than CAC (e.g., 5:1+) it’s a signal you should capitalize on your efficient customer acquisition strategies to drive substantial profitability and growth.

Monitoring and Adjusting the LTV:CAC Ratio

When you keep a close eye on your LTV: CAC ratio, you’re essentially keeping your finger on the pulse of your business’s health and performance. 

This ratio functions as a dashboard that provides real-time insights into the effectiveness of your marketing strategies, the value of your customers, and the overall sustainability of your growth trajectory.

You’re in control of maintaining equilibrium between what you spend to acquire customers and what they contribute to your bottom line over time.

This ongoing evaluation isn’t just about crunching numbers; it’s about understanding the story they tell. 

Trends in the ratio can reveal insights into shifts in consumer behavior, market dynamics, and the effectiveness of your marketing initiatives.

For example, a sudden decline in the ratio might signal that your acquisition costs are outpacing the value generated by your customers, prompting you to reassess your acquisition channels or refine your targeting strategies. 

Moreover, continuous monitoring enables you to detect potential issues or inefficiencies early on

This means you catch up quickly and can course-correct before they escalate into larger problems. 

It saves time, resources, and headaches down the road.

If you’re ready to start – start with the most efficient tool around. 

Omniconvert’s Reveal provides eCommerce & Retail businesses with the ability to monitor CLV and other essential metrics. We offer the most direct route to extract valuable data insights from your information. 

Reveal stands out as the first Customer Intelligence platform centered on Customer Lifetime Value, with seamless integration with Shopify. Even if you operate on a different platform, Reveal offers effortless integration with any other system.

Case Studies and Real-World Examples

Speaking of loyalty and referrals – let’s look at how Loyalty improves the LTC and, consequently, the LTV: CAC ratio in the real world.

Restoration Hardware

This case revolves around Restoration Hardware (known as RH), a company renowned for its high-end home furnishings available online, in galleries, and outlet stores across North America. 

In 2016, RH introduced its RH Grey Card loyalty program, effectively discontinuing discount sales. 

You can find a concise overview of their program on RetailDive.com. 

For an annual fee of $100, customers enjoy a 25 percent discount on items across departments, along with a 10 percent discount on clearance items, among other perks. 

For customers planning to spend $400 or more annually, the program becomes cost-effective.

The decision to charge a fee was significant but not unprecedented, considering companies like Amazon or Costco, which also require annual membership fees. 

RH’s customer base, predominantly rich, makes the fee reasonable for these clients. 

While not everyone can afford a $100 annual fee, RH’s metrics indicated it was the optimal price point for their clientele.

Did it succeed? 

Remarkably so. 

To date, 400,000 members have enrolled in the program, driving a staggering 95 percent of sales. Additionally, income from memberships outpaced sales growth upon program launch. Even more impressive, RH’s stock price surged tenfold, soaring from approximately $30 to over $300 at the time of this writing.

Some other inspiring stories from famous brands:

Crocs

This shoe company wanted to sell more shoes without discounts. 

They tried different ads for people who might stop buying. 

They also made sure that people who don’t care about prices don’t see discounts. This helped Crocs make a lot more money.

Netflix

People who use Netflix usually stay for about 25 months. 

Netflix knows that some people stop using Netflix because they don’t like waiting for DVDs. So, Netflix lets people watch movies online instead of waiting for DVDs. 

This made fewer people stop using Netflix.

Starbucks makes a lot of money because people like their coffee. They found out that if customers are happy, they spend more money. 

It’s cheaper to make customers happy than to find new ones. 

That’s why Starbucks works hard to make customers happy.

Wrap Up

Ultimately, if you monitor the CLV:CAC ratio you’re not simply tracking numbers. 

Instead, you’re driving informed decision-making, optimizing performance, and steering your business towards sustainable growth and long-term success. 

It’s about staying vigilant, staying agile, and staying ahead of the curve in such a hectic and unpredictable business environment.