LTV:CAC ratio is one of the key predictive indicators for the sustainable growth of your business. It shows the value of a customer (LTV) in proportion to the costs of acquiring a customer (CAC). In regard to different ratio values, we can identify following thresholds:
- LTV:CAC < 1:1 the revenue of the sales does not even cover the costs directly associated with winning new customers. Any new customer you gain causes your business to lose money.
- LTV:CAC = 1:1 the CAC payback threshold is reached: the revenue of the sales is just enough to cover the marketing & sales expanses. Overall the company is still losing money, as there are additional costs not yet covered by revenue.
- LTV:CAC < 3:1 (but above 1:1) depending on the individual structure of your business, your company may still lose money. LTV:CAC ratio below 3:1 is considered industry-wide not to be enough for an economically sustainable growth.
- LTV:CAC =3:1 is considered to be the minimum value required for the successful and sustainable growth of a company. The ideal LTV:CAC ratio lies between 3:1 and 5:1. A value in this range indicates not only a great business model but also a great team managing the CAC-LTV-pricing strategy triangle.
LTV:CAC Calculator: enter your values below
LTV:CAC related challenges in subscription businesses
- LTV:CAC ratio is not a static value: For example, if a new competitor enters the market, your subscribers could turn to its services. This would result in a LTV drop combined with an increase of your churn. In businesses strongly dependent on constant subscriber engagement, subscribers may easily lose interest and leave. For Example, in a fashion subscription company, the moment you stop providing new fashion models, the subscribers get bored and will leave, resulting in a sudden increase of churn.
- LTV:CAC ratio too low: Values around 2:1 or lower may indicate that your CAC value is too high, which means you may be using expensive or inefficient channels to obtain new subscribers.
- LTV:CAC ration too high: Values abover 5:1 are typically a sign of underspent marketing expenses, resulting in a low CAC value. In this case, the company is leaving money on the proverbial table, not fueling its growth by aquiring new customers.
- In order to better undestand the situation, additional parameters should be analyzed as well.