LTV:CAC ration is one of the key predictive indicators for the sustainable growth of your business. It brings the value of a customer (LTV) in relation to the costs of acquiring a customer (CAC). For the different ratio values we can identify following thresholds:
- LTV:CAC < 1:1 the revenue of the sales is not even covering the costs directly associated with winning new customers. Any new customer you gain make your business loose money.
- LTV:CAC = 1:1 the CAC payback threshold is reached: the revenue of the sales is just enough to basically the marketing & sales expanses. Overall the company is still loosing 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 still may loose money. LTV:CAC ration bellow 3:1 is industry wide considered not to be enough for an economically sustainable growth.
- LTV:CAC =3:1 is considered to be the minimum value required for a 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 indicated also a great team managing the CAC-LTV-pricing strategy triangle.
LTV:CAC Calculator: enter your values bellow
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 his services. This would result in a LTV drop combined with an increase of your churn. In businesses depending strongly on constant subscriber engagement, subscribers may easily loos interest the leave. For Exmaple in a fashion subscription company, the moment you stop providing new fashion models, the subscribers get bored and will leave, resulting in sudden increase of churn.
- LTV:CAC ratio to low: Values around 2:1 or lower may indicate, that your CAC value is too high, means you maybe using expensive odr inefficient cahnnels to obtain new subscribers.
- LTV:CAC ration to high: Values abover 5:1 are typically a sign of underspend marketing expenses, resulting in a low CAC value. In this case the company is “leaving money on the table” by not fueling its growth by aquiring new customers.
- In order to undestand better the situation additional parameters should be analyzed as well.