This implies an average customer lifetime of 20.0 months.
Monthly ARPU
Gross Margin
Monthly Churn
Lifetime
CAC
LTV : CAC Ratio
5.0 : 1
LTV
CAC
The LTV to CAC ratio measures the relationship between the lifetime value of a customer and the cost of acquiring them.
Essentially, it tells you the return on investment (ROI) for every dollar spent on acquiring a new customer. This ratio is a critical indicator of a company’s profitability, marketing efficiency, and long-term viability.
A ratio below 1:1 means you are losing money on every customer you acquire.
A ratio of 3:1 is generally considered a healthy benchmark, indicating a profitable and scalable business model.
A ratio above 5:1 suggests your business is highly profitable but might be under-investing in marketing and could be growing faster.
A common practice is to calculate CAC on a monthly or quarterly basis. For example, if you use your total sales and marketing costs from Q2, you must use the number of new customers acquired only in Q2. The key is to match the time period for both the costs and the customer acquisitions.
To get an accurate CAC, you must include all expenses involved in acquiring new customers. This includes:
Advertising Spend: Costs for Google Ads, social media ads, print, etc.
Salaries: The portion of salaries for your marketing and sales teams.
Commissions & Bonuses: Any performance-based pay for your sales staff.
Tools & Software: Costs for your CRM, marketing automation platforms, analytics tools, etc.
External Costs: Fees paid to marketing agencies, freelancers, or consultants.
You can improve the ratio by working on either side of the equation:
To Increase LTV: Focus on customer retention and value. You can achieve this by improving customer service, up-selling or cross-selling additional services, introducing loyalty programs, or adjusting your pricing strategy.
To Decrease CAC: Focus on marketing efficiency. Optimise your ad spend by concentrating on high-performing channels, improve landing page conversion rates, and invest in organic strategies like SEO and content marketing, which have lower long-term costs.
For a new business, calculating LTV requires making educated forecasts. You can use industry benchmarks and market research to estimate key inputs like average customer lifespan, churn rate, and purchase value. It’s best to create a financial model with a few scenarios (conservative, moderate, optimistic) and update your LTV calculation as you begin to gather your own real-world data.
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