LTV:CAC Calculator
Written by Michal Dallos
LTV:CAC ratio

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

Marketing & Sales Expenses

consists of marketing- & sales-related salaries, costs of tools, and marketing expenditures. As CAC refers to the acquisition of new subscribers, only the corresponding one-time cost component should be included. Recurring costs of customer service, like server costs and support, should not be considered.
Marketing & Sales Expenses per Month

Number of new Subscribers

is the number of new subscribers acquired per month. In case of businesses where new subscribers sign up
with a delayed relatively to the marketing activities the number new customers corresponding to the marketing & sales expenses need to be considered
New Subscribers at the end of the Month

ARPU

describes the average revenue per subscriber at the end the analyzed period. It can be easily calculated as: ARPU = Total Revenue / Number of Subscribers
€ ARPU per Month

Gross Margin

is the revenue that a company retains, after direct expenses associated with those revenue streams are covered. It can be easily calculated as: GM = (Total Revenue – COGS) / Total Revenue
%, Gross Margin

Churn

describes the fraction of subscribers who have dropped out over a specific time period – in this case month, relative to the existing subscriber base.
%, Chrun Rate

LTV = 0

CAC = 0

LTV : CAC = 0 : 1

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.

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