Calculate the ratio of Lifetime Value to Customer Acquisition Cost for business profitability analysis
The Lifetime Value to Customer Acquisition Cost (LTV to CAC) ratio is a crucial metric for businesses to evaluate the effectiveness of their customer acquisition strategies. It compares the lifetime value of a customer to the cost of acquiring that customer.
LTV represents the total revenue a business can expect from a customer throughout their relationship. CAC includes all the costs associated with acquiring a new customer, such as marketing and sales expenses. A higher LTV to CAC ratio indicates a more profitable customer acquisition strategy.
Investors and businesses use this ratio to determine the sustainability and scalability of their business model. A commonly accepted threshold for a healthy LTV to CAC ratio is 3:1, meaning the LTV should be at least three times the CAC.
| LTV | CAC | Ratio |
|---|---|---|
| $100 | $25 | 4:1 |
| $500 | $100 | 5:1 |