What is the LTV/CAC Ratio?

In general, CAC (customer acquisition cost) refers to the total budget that your organization devotes to sales and marketing to acquire new customers. Based on how much funds you spend on customer acquisition compared to how many customers you actually acquire, it determines your true profitability.

LTV (customer lifetime value) and CAC (cost per acquisition) work together to predict how much revenue a customer will generate as they interact with your business. A customer’s lifetime value is determined by how much time they spend with you over an extended period.

What is the LTV/CAC Ratio?

LTV/CAC ratios measure the connection between customer lifetime value and acquisition cost.

LTV/CAC Ratio: Customer Lifetime Value/Acquisition Cost Calculation - Wall Street Prep

Life-time value of a customer (“LTV”) depends on their profits, while acquisition cost (“CAC”) depends on the investment in acquiring them.

Based on the concept of LTV/CAC, a company calculates its LTV/CAC ratio by dividing the total sales (or gross margin) made by a single customer over the course of their lifetime (LTV) by the cost required to convince that customer or group to make their first purchase (CAC).

Why is LTV to CAC ratio (LTV:CAC) Important?

Due to the LTV:CAC ratio’s ability to shine a light on business expenses, you can see exactly what your sales, marketing and customer service departments are spending. It is crucial to understand how much your customers are worth to your business in order to find out where you can focus your efforts in order to maximize their value as customers.

Additionally, it helps you optimize your processes and strategies to lower the overall CAC, resulting in higher profits. Investing in marketing campaigns blindly, or pursuing hit-and-miss sales targeting methods, can seriously dent business turnover. Your LTV:CAC ratio should be balanced to ensure you are making the most wise investment both in time and money.

Summing up

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