The LTV:CAC Ratio measures the relationship between Average Lifetime Value (LTV) and Customer Acquisition Cost (CAC).
This metric is mainly used to assess customer profitability. It reflects the balance between the value a customer brings over their lifecycle and the investment required to acquire them. The ratio is useful for determining when to scale customer acquisition spending, identifying the most profitable customer segments, and highlighting areas where acquisition costs should be optimised.
To calculate the LTV:CAC Ratio, divide the Average Lifetime Value (LTV) of your customers by the Customer Acquisition Cost (CAC).
Aim for a healthy balance; too high a ratio might suggest underinvestment in customer acquisition, while too low indicates inefficiency. Be mindful of the time value of money: a higher CAC might be justified if the LTV is realised up front.
A common misunderstanding is that a higher LTV:CAC ratio is always better. While a high ratio can indicate efficient use of acquisition resources, a very high ratio can suggest underinvestment in growth.