Every investment counts, and to assess whether you will really be profitable in the future, the LTV/CAC ratio is your best ally.
This essential indicator measures how profitable your customers are by comparing the value they bring in the long term (LTV) to the cost of acquiring them (CAC).
By balancing these two elements, you can not only optimise your budget, but also refine your strategies.
To fully understand the LTV/CAC ratio, it is crucial to define its two main components: LTV (Lifetime Value) and CAC (Customer Acquisition Cost).
Together, these indicators make it possible to assess whether acquired customers generate enough revenue to cover acquisition costs and generate sustainable income.
LTV, or lifetime value, represents the amount of revenue a customer generates for a brand over the entire duration of their relationship with it.
CAC, or customer acquisition cost, measures the amount invested to acquire a new customer.
It includes all marketing and sales expenses incurred to attract, convince and convert a prospect into a customer.
LTV/CAC is much more than a simple financial indicator: it informs your strategic decisions in terms of acquisition and customer retention.
LTV/CAC highlights the balance between acquiring new customers and retaining existing ones.
By calculating this ratio, you get a clear picture of the value each buyer generates over time compared to what was spent to acquire them.
This calculation helps you understand whether efforts are profitable and how they translate into lasting customer relationships, reinforcing loyalty.
A favorable LTV/CAC indicates that your new customers are earning more than they're costing.
This means that the acquisition strategy is profitable and supports the company's development.
This calculation helps to identify the acquisition channels and campaigns that generate the best results, enabling the budget to be allocated where it will have the greatest impact to achieve optimum ROI.
LTV/CAC enables the budget to be allocated efficiently between acquisition and retention, according to expected profitability.
This helps companies to invest where the return is greatest, maximizing profits while minimizing costs.
By analyzing the ratio, brands can make more informed marketing choices, focusing on the most profitable segments and adjusting their strategies accordingly.
This becomes a valuable guide for prioritizing investments.
This ratio offers a clear perspective on the value generated by each customer, enabling companies to make more precise decisions on investment and the definition of growth objectives.
An optimal LTV/CAC attracts investors by offering concrete evidence of the company's profitability and long-term viability.
A balanced ratio demonstrates that the brand is controlling its acquisition costs while maximizing the value of each customer, which is essential for sustainable revenues.
For investors, a favorable ratio is an indicator of financial stability, showing a solid acquisition and retention strategy.
To measure the ratio, we first need to calculate the two essential components: LTV (Lifetime Value) and CAC (Customer Acquisition Cost).
These calculations provide a clear picture of profitability per customer and the efficiency of acquisition investments.
LTV, or Customer Lifetime Value, represents the revenue a customer is expected to generate for the company over the lifetime of the relationship. Several factors come into play:
LTV = (Average amount per purchase) x (Purchase frequency) x (Customer lifetime)
This formula helps to evaluate what each customer can contribute over the long term, offering a broader vision than that given by a single transaction.
Note that this calculation can be optimized with a CRM, which centralizes purchase and customer interaction data.
With a CRM, it is possible to better estimate the lifespan of customers by tracking their purchase history, commitment and loyalty.
The CAC, or customer acquisition cost, represents the amount invested to acquire a new customer. It includes all expenses linked to marketing campaigns, promotions, sales teams and the technologies used to attract new customers.
CAC = (Total cost of acquisition) / (Number of new customers)
Knowing your CAC is essential for evaluating the effectiveness of acquisition campaigns and optimizing marketing budget allocation.
Once the LTV and CAC have been calculated, the LTV/CAC ratio can be obtained. This ratio indicates whether each euro invested in acquisition generates sufficient value for the company.
LTV/CAC ratio = LTV / CAC
A ratio greater than 1 indicates that each customer will bring in more than the cost of acquiring it, which is favorable.
Let's imagine an e-commerce company with the following data:
LTV = €50 x 3 x 2 = €300
CAC = €10,000 / 100 = €100
LTV/CAC ratio = €300 / €100 = 3
This ratio of 3 means that for every €1 spent, the company generates €3 in revenue per customer, which corresponds to a good level of profitability.
Let's take another example where an e-commerce company presents the following data:
LTV = €30 x 2 x 1.5 = €90
CAC = €15,000 / 100 = €150
LTV/CAC ratio = €90 / €150 = 0.6
In this scenario, the LTV/CAC ratio is 0.6, which means that for every euro spent to acquire a customer, the company generates only €0.60 in revenues.
In other words, it loses €0.40 for every €1 invested in a buyer.
An LTV/CAC ratio of 3:1 is considered a good balance.
This ratio means that for every 1 euro invested in customer acquisition, you generate 3 euros in revenue.
Such a ratio indicates healthy profitability: your customer base provides far more value than it costs to acquire, ensuring a comfortable margin.
Optimizing the LTV/CAC ratio is essential to ensure sustainable, profitable growth. A balanced ratio means that the company maximizes the value generated by each customer while controlling acquisition costs.
An optimized LTV/CAC ratio maximizes the return on every euro invested.
By increasing customer lifetime value and reducing acquisition expenses, you achieve a higher ROI, enabling the company to generate more comfortable margins and invest more in other initiatives, such as product development or expansion into new markets.
A solid LTV/CAC ratio is a powerful argument for attracting investors.
A good ratio proves that the company is capable of generating long-term revenues and maintaining a profitable acquisition strategy.
Investors are looking for companies that control their acquisition costs and know how to maximize customer value.
An optimized LTV/CAC ratio shows that the company not only acquires customers, but is also able to retain them and maintain a lasting relationship.
This reflects a long-term strategy focused on customer retention and satisfaction, which are crucial to sustainable growth.
By improving this ratio, the company proves that it can not only attract customers, but also keep them and make them an ongoing source of revenue.
A good LTV/CAC ratio helps the company to be less vulnerable to variations in acquisition costs or changes in purchasing behavior.
If spending temporarily increases, a company with a high LTV is better positioned to absorb these fluctuations.
By optimizing this ratio, the company strengthens its ability to grow even in a competitive or unstable environment.
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An LTV/CAC ratio of 3:1 is considered a good balance.
This ratio means that for every 1 euro invested in customer acquisition, you generate 3 euros in revenue.
Such a ratio indicates healthy profitability: your customer base provides far more value than it costs to acquire, ensuring a comfortable margin.
Optimizing the LTV/CAC ratio is essential to ensure sustainable, profitable growth. A balanced ratio means that the company maximizes the value generated by each customer while controlling acquisition costs.
An optimized LTV/CAC ratio maximizes the return on every euro invested.
By increasing customer lifetime value and reducing acquisition expenses, you achieve a higher ROI, enabling the company to generate more comfortable margins and invest more in other initiatives, such as product development or expansion into new markets.
A solid LTV/CAC ratio is a powerful argument for attracting investors.
A good ratio proves that the company is capable of generating long-term revenues and maintaining a profitable acquisition strategy.
Investors are looking for companies that control their acquisition costs and know how to maximize customer value.
An optimized LTV/CAC ratio shows that the company not only acquires customers, but is also able to retain them and maintain a lasting relationship.
This reflects a long-term strategy focused on customer retention and satisfaction, which are crucial to sustainable growth.
By improving this ratio, the company proves that it can not only attract customers, but also keep them and make them an ongoing source of revenue.
A good LTV/CAC ratio helps the company to be less vulnerable to variations in acquisition costs or changes in purchasing behavior.
If spending temporarily increases, a company with a high LTV is better positioned to absorb these fluctuations.
By optimizing this ratio, the company strengthens its ability to grow even in a competitive or unstable environment.
Loyoly is a loyalty and referral platform combined with UGCs, which helps to engage customers in 40+ ways to increase LTV and social proof, while reducing CAC.
