Overview

In e-commerce, grasping success metrics is vital. The LTV:CAC ratio, often neglected, compares customer lifetime value to acquisition cost, revealing customer worth.

What is LTV:CAC ratio?

In the world of eCommerce, understanding the metrics of your business’s success is crucial. The LTV: CAC ratio, often overlooked, is one such critical metric. It stands for the ‘Customer Lifetime Value to Customer Acquisition Cost’ ratio and is used to determine the value a customer brings over their lifetime compared to the cost of acquiring that customer.

Formula

LTV:CAC = Customer Lifetime Value / Customer Acquisition Cost

Example

Let’s say, for instance, through the lifetime of their relationship with your business, an average customer brings in a gross profit of $600 (LTV). Suppose, on the other hand, it costs your business $200 to acquire a new customer (CAC). Your LTV: CAC ratio would be $600/$200, or 3:1.

Why is LTV:CAC ratio important?

LTV:CAC ratio is instrumental in gauging the long-term profitability of your customer acquisition strategy. A high LTV:CAC ratio means you’re making more profit per customer compared to how much you’re spending to acquire new customers, which is essential for sustainable and profitable growth. A low LTV:CAC ratio can indicate that too much is being spent to acquire customers compared to the value those customers bring, thus jeopardizing profitability.

Which factors impact LTV:CAC ratio?

Factors affecting this ratio within your business might include product pricing, competition, industry, marketing efficiency, customer retention rate, and customer service quality.

How can LTV:CAC ratio be improved?

Improving the LTV:CAC ratio often involves two sides – increasing the LTV or reducing the CAC. Optimizing your marketing strategy to target high-value customers, improving your product or customer service to increase customer retention, or trying to upsell/cross-sell to your existing clients are some ways to improve LTV. On the other hand, optimizing your ad spend, improving lead conversion rates, or cost-effectively reaching your target market are some strategies to reduce the CAC.