# LTV CAC Ratio: What is it, How to Calculate & More

Contributors: Amol Ghemud
Published: February 9, 2023

## Summary

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The link between a customer’s lifetime value and the cost of acquiring them is measured by LTV/CAC. Client acquisition cost (CAC) is the cost incurred when a customer is convinced to buy a product, whereas customer lifetime value (LTV) refers to the profit generated by a customer.

You can calculate how much money you should spend on client acquisition using the LTV CAC ratio. If this ratio is low, you’re essentially losing money over time.

## Summary of CAC and LTV

Client acquisition cost, or CAC, is the sum of sales and marketing expenses your company makes to bring in a new customer within a specified timeline. Since it compares the amount of money you spend on customer acquisition to the number of customers that joined, it establishes the true profitability of your firm.

The LTV (customer lifetime value) statistic, in combination with the CAC metric, predicts the income generated by a client over the length of their transactions with your company. Those who spend the most money with you over the longest time have the highest LTVs.

## What does LTV to CAC ratio mean?

The LTV CAC ratio contrasts a client’s lifetime value with the sum of money spent on their acquisition. The ideal situation would be the following:

• Your CAC is around three times less than the lifetime value of each new client you acquire (LTV). In other words, you want to achieve a 3:1 LTV: CAC ratio.

You are overpaying if your calculations indicate that the ratio is more even than this (for instance, 1:1). If your LTV is significantly more than your CAC (for instance, a ratio of 4:1), you probably aren’t spending enough. You will surely miss out on business opportunities as a result.

According to the general rule, if you consistently aim for an LTV to CAC ratio benchmark of 3:1, you should remain on the correct path. You should be aware that it typically takes a year to repay the costs of obtaining a new customer.

## LTV/CAC Formula

The LTV/CAC ratio is conceptually derived by dividing the total sales (or gross margin) made to a single customer or customer group throughout their lifespan by the expense necessary to persuade that customer or customer group to make their first purchase (CAC).

Customer lifetime value (LTV) is divided by customer acquisition cost to calculate the LTV/CAC ratio (CAC).

LTV/CAC Ratio = Lifetime Value ÷ Customer Acquisition Cost

## Calculate LTV/CAC Ratio

Do not have CLTV Details? CLTV Calculator
Do not have CAC Details? CAC Calculator

## LTV to CAC ratio (LTV: CAC): Why is it Important?

The LTV to CAC ratio may shed light on business expenses, making it possible to determine just how much money is being spent on sales, marketing, and customer service. By identifying the value of each consumer to your company, you can direct your efforts where they will be most valued and, thus, most profitable.

Additionally, it helps in process and strategy optimization, reducing CAC as a whole and boosting revenues. Blindly investing in marketing efforts or using hit-and-miss sales targeting strategies is a waste of money and can significantly impact business turnover. You can be certain that you’re spending your time and money wisely by putting your LTV: CAC ratio into balance.

## How can the CAC-LTV Ratio be optimized?

Make sure you’ve properly estimated the CAC before optimizing your spending. If everything is in order, the following advice might be helpful.

### 1. Consider the appropriate channels.

The outlets that draw in most clients aren’t always effective. A focused and well-informed approach will draw leads who are more likely to be interested in your solutions because 81% of buyers investigate products online before making a purchase. You get good-quality consumers while spending less money.

### 2. Try a variety of prices.

Experiment with your price to identify the elements that can convince more customers to upgrade. It could involve a higher price tier, a feature-based pricing scheme, a seat-based pricing scheme, etc. Your CAC would be reduced the faster you can convert freemium consumers to a subscription plan. But don’t compromise on client satisfaction.

### 3. Simplify sales processes

A longer sales cycle or a difficult sales process will result in a higher CAC. Keeping your prospects interested with a successful hand-holding procedure and good onboarding is crucial. Make sure you spend in creating a narrow funnel and making each step simple to follow. Retaining clients is important.

CAC will make up the majority of your cost of revenue reduction if you want to be a profitable business. In addition, you need loyal, high-quality clients that will support your business for a very long time, giving you a high lifetime value and the possibility to increase your income.

## FAQs-

1. What is a good LTV to CAC ratio?

The ideal LTV/CAC ratio is 3:1, which indicates you should make three times what you spent on client acquisition.

What is the LTV CAC ratio benchmark SaaS?

For a financially sustainable SaaS firm, LTV should be at least three times the CAC. If your LTV: CAC ratio falls below 1:1, your company loses money. An extremely high LTV: CAC ratio may imply that you are not investing as much in acquiring new consumers as you should.

2. How do you convert LTV to CAC ratio?

Customer lifetime value (LTV) is divided by customer acquisition cost to calculate the LTV to CAC ratio (CAC).

LTV/CAC Ratio = Lifetime Value ÷ Customer Acquisition Cost

3. What is the CAC benchmark?

The cost of acquiring a new lead, subscriber, or customer is the Customer Acquisition Cost (CAC). The lower the cost, the better because it represents a cheaper cost for each new consumer. CAC is the metric used to evaluate marketing efforts. CAC measures how difficult it is to acquire new consumers.

The goal is that the CAC is less than the expected revenue per client, allowing you to profit from your selected acquisition strategy.

4. What does CAC mean?

The total expense of marketing and sales efforts to bring in a new customer is the CAC, or customer acquisition cost.

By dividing all of the costs associated with acquiring new clients by the volume of clients received during the time frame in question, CAC can be calculated. Consider a business that spent \$1,000 on promotion yearly and added 1000 customers in the same period. Accordingly, the CAC is \$1.

5. How do you convert LTV to the CAC model?

Calculating the TV to CAC Ratio is straightforward once you have determined the LTV and CAC separately. Multiply LTV by CAC. For instance, your LTV: CAC ratio would be 3:1 if your client’s lifetime value was \$3,000 and your customer acquisition costs were \$1,000.

6. What is a good LTV to CAC ratio

What is a desirable CAC: LTV Ratio? The LTV/CAC ratio should ideally be 3:1, meaning you should earn three times as much as you would have to spend to acquire a customer. Your company sends a smoke warning if your LTV/CAC is less than 3!

7. Is High LTV CAC good?

3:1 or higher serves as a decent LTV CAC ratio standard. Generally, a robust company model has a ratio of 4:1 or higher ratio. If your ratio is 5:1 or more excellent, you may be expanding more quickly and are underfunding your marketing efforts.

8. What is the formula for LTV?

Simply dividing the loan sum by the asset’s value or collateral being used as collateral results in the loan-to-value (LTV) calculation. This would be the mortgage balance divided by the property’s value in the event of a mortgage.

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