LTV:CAC Ratio
The ratio between a customer's lifetime value and their acquisition cost. A 3:1 ratio is healthy. Below 2:1 is risky. Above 5:1 often signals underinvestment in growth (you could be more aggressive in acquisition).
In practice
LTV:CAC is the growth engine's 'health score.' 3:1 means for every $1 spent on acquisition, you earn $3. 1:1 means every dollar acquired returns $0 profit (a loss once operating costs are factored in).
Common misconception
'An LTV:CAC of 5:1 is excellent.' Not necessarily. A 5:1 ratio can mean you're not exploiting your growth potential. If you can raise CAC (and acquire more customers) while staying at 3:1, it's worth doing. A 5:1 ratio with 0% growth is a missed opportunity.
How to fix it
Low LTV:CAC? (1) Raise LTV — subscriptions, loyalty, upsells, (2) Lower CAC — SEO, referrals, email lead gen, (3) Improve product-market fit — high churn signals a product issue, (4) Break LTV down by cohort — are some cohorts better or worse on LTV:CAC?
Example
Beauty store: LTV $130, CAC $60 = 2.2:1 (low). Analysis: top 20% of customers had LTV $330 at the same CAC = 5.5:1. Conclusion: wrong target audience. Shifted targeting to a lookalike of the top 20% of customers. LTV:CAC rose to 3.8:1 within 6 months.
Priority
Calculate LTV:CAC once a quarter. Below 2:1 → pause paid acquisition until fixed. Between 2-3:1 → optimize. Above 3:1 → increase budget aggressively.
Related terms
Keep learning. Metrics that touch the same area:
- ConversionAnalyticsA desired action a visitor takes — a purchase, sign-up, form submission. The basis for measuring marketing success.
- Conversion Rate (CR)AnalyticsThe percentage of visitors who completed a desired action. Average: 1-4% for purchases, depending on category.
- ATC – Add To CartAnalyticsThe action where a visitor adds an item to the cart. Average ATC rate: 8-10% of product page visits.
- Cart AbandonmentAnalyticsA customer added an item to the cart but didn't complete the purchase. Average: 70-75%. One of the biggest opportunities.
- Open RateAnalyticsThe percentage of recipients who opened the email. Average: 20-25% in eCommerce.
- Click RateAnalyticsThe percentage of recipients who clicked a link. Average: 2-3%. A CTOR (click-to-open rate) of 10-15% is a good target.
Jimmy tracks your LTV:CAC Ratio, automatically
WhatsApp alerts when something important changes. No dashboards, no hassle.