Data Analytics

Get More Control Over Sales Performance Calculating Your LTV-to-CAC Ratio

You’ve got to spend money to make money — or so says every professed marketing guru out there.

This advice isn’t inherently wrong, but more marketing doesn't always mean better results. Profitable strategies are about more than the number of eyeballs you reach — or even what revenue you get from an individual campaign.

Better marketing means figuring out what processes and techniques net you sustainable growth.

After all, your day-to-day key performance indicators (KPIs) might show that you’re bringing in business left, right, and center. But if you’re overspending on each individual customer, these sales aren’t worth much to your bottom line.

Or a promotion’s total value may grow outside of its campaign context. If you aren’t tracking trickle-down effects like repeat purchases, you miss opportunities to scale up what’s working well.

Here’s the good news: The keys to ongoing growth already lie in your store’s data. It comes down to three key data metrics:

  • Your customers’ lifetime value (LTV)
  • Your customer acquisition cost (CAC)
  • The relationship between these two metrics, calculating your LTV-to-CAC ratio

Why Calculate LTV-to-CAC Ratio?

Not all customers are created equal. Understanding each buyer’s profit potential is the first step to managing them — and determining what efforts are worth taking to engage them.

This measure is a customer’s lifetime value (LTV) — a metric of their spending over time, buying frequency, and purchasing behavior.

If Joe makes a one-time purchase for $100, but Sara buys one $25 item each month of the year, she’s your higher-LTV customer.  

You want to attract — and retain — more Saras. Research shows that prioritizing your high-LTV customers is far cheaper than grabbing for new ones. Reducing their churn by just 5% can increase profits by up to 25 percent.

On their own, LTVs can guide retention-based marketing decisions like:

  • Focusing on the channels that bring in high-LTV customers
  • Segmenting your customers to make retention strategies more effective
  • Leveraging high-LTV customers’ buying patterns to trigger product recommendations and promotional discounts

But the LTV metric becomes even more powerful compared against your customer acquisition costs (CAC.) This relationship shows you not only how profitable your customers are, but also at what cost to you. At its core, the LTV:CAC ratio is a measure of sales and marketing efficiency.

Your LTV:CAC Ratio — a Cost-Benefit Analysis

Your current strategy may be reaching customers with greater LTV potential. However, your LTV:CAC ratio will reveal if it’s actually cost-effective.

Let’s say your e-commerce business spends a total of $10,000 on a Google Ads campaign. Your analytics show that:

  • You acquire 100 new customers. 
  • The average monthly revenue your store nets per customer is $25.
  • On average, your store’s customer life span — the number of months a person keeps buying from you — is 24 months.

In this scenario, your store can measure its campaign’s:

  • LTV: [average monthly revenue per customer in dollars] x [customer life span in months] = $600
  • CAC: [total campaign expenses] / [number of new customers acquired from the campaign] = $100

This makes your LTV:CAC ratio 6:1. Throw your team a party — experts generally consider a 3:1 within 12 months ratio a sign of a healthy, growing company. Numbers are multipliers so, for example, 6 means that LTV is 6 times the CAC value. 1.00 would mean the cost = the return.

Ratios lower than this benchmark spell trouble — the marketing investments you’re making aren’t sustainable. But this knowledge is crucial to making the right strategy changes, especially if surface-level KPIs like click-through rates illustrate a promising but potentially incomplete picture.

A higher ratio affirms that your customer acquisition methods are working — and they’re bringing in longer-term, higher-value buyers. You're making more money than the cost to bring them in. That is the end game.

This isn’t just good news for your bottom line. Businesses with greater LTV-to-CAC ratios tend to have higher valuations poised for faster, more predictable growth — making them attractive to investors and venture capitalists.

Optimizing Your Profitability Ratio

The example above is a basic measure of a software as a service (SaaS) or e-commerce company’s profit generation.  

Regardless of your business activity, a CAC calculation will always be your total expenses divided by the number of new customers acquired.

But there are many different ways to measure an LTV metric, with formulas adaptable to the type of business you run and what your goals include, like:

  • Measuring the value of a specific campaign
  • Performing a month-to-month cohort analysis to spot trends like purchasing drop-offs
  • Taking a predictive approach modeled on past customers’ purchases and behavior

For example, an e-commerce company could enhance this basic LTV formula by measuring for customers’ repeat activity, with a calculation like: [average revenue per customer] x [average number of repeat sales per customer] x [average customer life span in months].

Or some businesses, like those with a mobile app, might want to include another specific dimension, like with: [average revenue per user] x [1/ monthly churn] + [referrals].

In general, the more data you include, the more personalized, precise, and usable a metric you get. For example, you could add in elements like:

  • Accounting for gross profit margin: [average order value] x [number of repeat transactions] x [customer life span in months] x [gross margin percentage]
  • Analyzing different time periods or cohorts: [Average monthly or annual recurring revenue per account] x [1/monthly or annual churn] x [gross margin percentage]
  • Predicting behavior: [Average transactions per month] x [average order value] x [average gross margin] x [average customer life span in months] / [number of customers expected for your measurement period]
  • Factoring in discounts: [Gross margin percentage x average revenue per customer] x [monthly retention rate / (1 + monthly discount rate - monthly retention rate)]

Once you have the LTV, all you have to do is divide it by your CAC to find the ratio.

Make Business Growth Simpler

Monitoring your business’s LTV-to-CAC ratio gives you more control over your sales performance. From resource allocation to marketing strategies, it’s one of the most important metrics to measure how well your efforts attract — and retain — high-value customers.

But as with most data, your business gets the most value if you track this metric over time. Customer behaviors and trends change constantly. Your ratio may indicate sustainable growth one month, only to have the same calculations signal a need for adjustments in the next.

This number-crunching cycle can get complicated fast.

Automate it all with Peel’s analytics platform. Just connect your e-commerce store and voila — more than 35 of your business’s data metrics get monitored, analyzed, and reported back to you.

That means you spend less time translating metrics and more time making data-driven decisions. Start a 30-day free trial to spot what opportunities you might be missing to power sustainable growth.  

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