The customer lifetime value and customer acquisition cost are two very important metrics to understand the average valuation of a single customer and the marketing efforts to acquire them.
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The Customer Lifetime Value to Customer Acquisition Cost or LTV:CAC ratio, measures the relationship between the lifetime value of a customer and the cost of getting that customer. Whether you are a SaaS company, an early stage startup, or work with any other business model, the LTV CAC ratio is an important metric to know in order to manage your marketing expenses, customer retention, cash flow and customer churn.
To calculate your LTV:CAC ratio, you divide your average customer lifetime value by the customer acquisition cost. (Ex: $200 LTV / 50$ CAC = 4). The ratio then can be used to measures the return on investment (ROI) for each dollar your brand spends to acquire a new customer. So in our example, each dollar invested would bring 4$ in profitability.
A good LTV:CAC ratio should be about 3 to 1. The value of an average customer should be three times more than the cost of acquiring them.
More or less than a ratio of 3 to 1 can be a “bad” ratio, or at least need some optimization. If the ratio is about 1 to 1, you are either having a too high marketing spend for each new customer or have a pricing that’s too low. You might also want to look at the retention rate of your existing customer base and average order value. If it's a lot higher (like 5 to 1 or more), you may be spending too little and could be improving your revenue growth by investing more in your marketing strategies and marketing campaigns.
Your LTV:CAC ratio and all your customer data can be tracked in reports already filled with important metrics for your objectives. Here are some of them:
Executive report template
This dashboard template is filled with metrics your C-suite will want to see. Show them your revenue, new customers, churn rate, and more. You can also add some customer satisfaction KPIs, gross margin, or customer data to have a better overview.
Google Analytics report template
Check the number of customers, traffic, customer journey through your website, and more with this easy-to-use GA template.
Ecommerce report template
A report with all the most important metrics for your ecommerce site, like shopping cart abandonment, click-through rate, and revenue.
How can you get the best possible LTV:CAC ratio? Here are some tips:
Optimize your marketing costs
Get a better number of new customers for less by optimizing your marketing strategies and investing in the marketing campaigns that has the best possible ROI (Google ads, social media, email marketing, SEO etc.). Particularly if you are in a growth stage, investing in your marketing campaigns can make a huge difference. Make sure to track your SaaS metrics and marketing metrics to know what needs to be optimized.
Optimize your churn rate
Particularly if you are a SaaS business, your annual recurring revenue (ARR) and Monthly recurring revenue (MRR) is highly depending on your monthly churn. for a high LTV (therefore a higher LTV:CAC ratio) you need a good customer churn rate.
Align your pricing
Maybe your pricing is too low or too high and hurts your LTV: CAC ratio and your average revenue. If so, make sure you are aligned with the industry benchmark, get feedback from your customers, and analyze your metrics to make sure your pricing model and plans make sense.
