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

Contributors: Amol Ghemud
Published: February 9, 2023

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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

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.


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.

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

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.

Read more :

How to Calculate Customer Acquisition Cost with Formula

Startup Customer Metrics 101: Customer Acquisition Cost

10 Mistakes Startup Founders Should Avoid in their Early Days

About the Author

Optimizer in Chief

Amol has helped catalyse business growth with his strategic & data-driven methodologies. With a decade of experience in the field of marketing, he has donned multiple hats, from channel optimization, data analytics and creative brand positioning to growth engineering and sales.

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