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June 30, 2022

As a business owner, it’s important to keep track of your LTV vs CAC ratio. This guide will show you how to do it in real-time so you can make adjustments as needed.

LTV vs CAC: Which Metric is More Important?

LTV and CAC are two of the most crucial metrics to track in a SaaS business. Let’s compare LTV vs CAC and how they relate to each other.

LTV stands for “Lifetime Value” and it is used to measure the profitability of a customer.

CAC stands for “Customer Acquisition Cost” and it is used to measure how much it costs to acquire a new customer.

LTV should be higher than CAC because it refers to how long a customer will continue to use your product while CAC only looks at the initial purchase.

Why LTV-to-CAC Ratio Matters for Online Companies

The Lifetime Value of a Customer (LTV) to the Customer Acquisition Cost (CAC) ratio is a must-track metric that measures the profitability of your business.

As an e-commerce company, you must know how to track it, calculate it, and optimize it.

What is LTV:CAC Ratio?

LTV:CAC ratio is a key metric for evaluating your brand’s marketing effectiveness and long-term profitability. By calculating your LTV:CAC ratio, you can determine how much you can afford to spend on acquiring new customers while still maintaining a healthy margin.

Measuring, tracking, and improving your LTV is key to your success because it tells you how much revenue you’re generating from each customer, and it predicts how profitable your business will be in the future.

Even 1:1 ratio

A 1:1 ratio is when a company spends the same amount on customer acquisition as it does on customer retention. This likely means the company is losing customers, which is bad for business.

While it may look like the company is making no profit off each lead, it’s actually losing out on each sale when accounting for shipping and taxes.

LTV is lower than CAC

If a company’s customer acquisition cost (CAC) is 1.25 times higher than its lifetime value (LTV), then the company will lose money on every sale even when marketing costs are only accounted for.

Considering other costs, then the company is likely to lose a significant amount of money on each new customer you acquire.

LTV is higher than CAC

If a company has a 2:1 or 3:1 ratio, it should expect to make 2 or 3 times more than what it spent on acquiring customers.

A 3:1 ratio is sometimes seen as a benchmark, as it indicates how much a company makes on a dollar spent. This number can vary, however, depending on the industry, and the length of time that the company has operated.

A 4:1 ratio can mean growth opportunities so you should consider increasing your marketing budget.

LTV is much higher than CAC

If the ratio is heavily skewed towards LTV, then the company may be missing a huge opportunity to grow its sales. This is the perfect time to scale up marketing.

How to Calculate LTV:CAC ratio

To calculate LTV:CAC ratio, simply divide the average LTV by the CAC over the same period.

The ROI of customer acquisition is the ratio of the profit you make from each customer to the cost it took you to get them.

ltv vs cac (Source)

To calculate the ratio, you need to determine the LTV and CAC separately.

If your LTV is $1500 and your CAC is $500, then your 3:1 ratio means you’re generating $3 for every $1 you spend.

How to Leverage LTV:CAC for Growth

LTV:CAC is the single most important metric for long-term success. Even if you don’t plan to seek funding, you should track it.

1. Lower your CAC by Reducing Paid Ads

Paid advertising is a quick way to generate awareness, but it’s expensive. It’s best for early-stage brands but isn’t scalable.

After you’ve grown your customer base through advertising, try investing more in methods that don’t require you to spend as much on marketing. Some ways to do this are:

Launch an Affiliate Program

If you’re looking to control your customer acquisition costs (CAC), an affiliate program could be a great option. With an affiliate program, you only pay commissions to your affiliates for customers they bring in, making it a more cost-effective way to acquire new customers.

Leverage customer referral programs

A referral program is a great way to reduce your marketing costs by acquiring new, loyal customers. Research from Wharton Business School found that referrals are 23% cheaper on average than non-referrals and that 70% of consumers say they’re more likely to make a purchase based on a referral.

Referred customers are more likely to make repeat purchases and have a higher average retention rate. This means that they are also more valuable to a company, as they will generate more revenue over their lifetime.

Search engine optimization (SEO)

Search engine optimization is a long-term strategy that takes months to start seeing results on search engines.

However, SEO is a great long-term investment that will continue to pay off for your website. The initial investment and effort may seem daunting, but the results are worth it!

Search engine optimization (SEO) provides a significant return on investment (ROI) because it allows you to earn organic search traffic to your website. When you optimize your website for targeted keyword phrases, you increase your chances of ranking for those terms, which drives more qualified leads to your site.

2. Focus on Customer Retention

While social media is great for building your brand and attracting new followers, keep in mind that these channels are rented spaces.

This is why having your own email list and text message subscribers is so valuable: they are your own communication channels.

You can decrease your CAC and increase your LTV by focusing less on acquisition and more on customer retention. Tie up your CRM data into your SMS messages, emails, and your paid ads.

Using email, text messages, and other methods, you can reach out to customers without having to spend a ton of money. You can also drive more sales by reaching out to customers who have already purchased your products.

3. Identify Your Most Valuable Customers

You may be familiar with the rule of 7, which states that a customer needs to come across your creatives at least 15 times before they convert. However, some customers don’t convert even after this many exposures. The 16th or 17th might do the trick, though.

But are these clients worth the cost of retargeted ads?

LTV: CAC is the answer. While the cost of acquiring them may be high, if they stick around for a long time, they could still be worth a lot.

Some prospects are easier to convert, but they may not have a high lifetime value. For example, bargain hunters during Cyber Week might buy your best deals and then never purchase anything else from you. While it’s easy to convert these types of customers, they’re not necessarily profitable in the long run.

By dividing your customer base into segments and calculating LTV:CAC for each segment, you can figure out which customers you should be spending the most on.

4. Make LTV a Metric Owned by All Teams

LTV is a key metric for e-commerce businesses that can have a significant impact on various areas of the company. All teams should work together to improve LTV by focusing on this metric.

There are a few ways to boost LTV. Raise the average purchase amount, get customers to opt-in to subscriptions, and get them to make repeat orders.

You can also improve your margins by negotiating with your suppliers, improving your operational efficiency, and lowering your COGS (cost of goods).

Lastly, providing great customer service and implementing a friendly return policy are essential to keep customers.

5. Make Data-Driven Decisions

By making decisions based on data, companies can improve LTV by targeting specific areas for improvement and also by continuing to do more of what is working well.

For instance, if your customers who are referred to you by other customers tend to spend more than your average customer, it might be worthwhile to invest more in your referral programs.

If your customers aren’t returning, you may want to look at factors like brand loyalty and spending patterns. You should also consider ways you can improve your customer referrals.

If you’re looking to increase your customer lifetime value, it’s important to make decisions driven by data. Consider things like post-purchasing marketing efforts, customer experience, and product catalog. Also, take a look at your channel mix and the first product purchased.

By taking all of these factors into account, you can make decisions that will help increase your customer’s lifetime value.

How to Monitor Your LTV:CAC Ratio in Real-Time

To monitor your LTV:CAC ratio in real-time, it is important to centralize your analytics to combine data from multiple channels. This will allow you to see how your efforts across various channels are impacting both your LTV and CAC.

Conclusion

It’s important to monitor your LTV vs CAC metrics so that you can ensure you’re getting a good return on investment. By tracking it in real-time, you can make adjustments as needed to keep your business on track.

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