LTV:CAC is a ratio that compares the lifetime value of a customer to the cost of acquiring that customer. It provides insights into the return on investment (ROI) of a company's marketing and sales efforts.
LTV:CAC is a critical metric, because it helps companies understand the balance between customer acquisition costs and customer lifetime value. A high LTV:CAC ratio indicates that the company is effectively acquiring customers at a low cost and that they have a high lifetime value, which ultimately leads to greater profitability. On the other hand, a low LTV:CAC ratio indicates that the company is either spending too much to acquire customers or that their customers have a low lifetime value.
To calculate LTV:CAC, a company must first determine the Lifetime Value (LTV) of a customer. LTV can be calculated by dividing the average revenue per account by the churn rate. Then, the company must determine the cost of acquiring a customer (CAC), which can be calculated by dividing the total cost of sales and marketing by the number of new customers acquired. Finally, LTV:CAC is calculated by dividing LTV by CAC.