What’s a Good LTV To CAC Ratio? How To Calculate LTV To CAC

Marketing is, ultimately, an investment. Even if you don’t see your dream results the next day, you eventually expect some sort of payoff for your efforts, not just a pile of receipts. So how do you know if your marketing spend is actually building profits, or if you’re just burning cash?

Your customer lifetime value (LTV) to customer acquisition cost (CAC) ratio is the clearest way to measure how much revenue a customer generates relative to how much you spent to acquire them. Here’s what the LTV:CAC ratio is and how to calculate it, as well as strategies for improving your ratio so your business is ready to scale.

What is the LTV to CAC ratio?

The customer lifetime value (LTV) to customer acquisition cost (CAC) ratio compares the value a single customer brings to your business over the course of their lifetime to the cost of acquiring them through ad spend. Put otherwise, it’s how much money you make from a customer versus how much you spent to get them. 

In practice, you calculate these values by averaging across your customer base to account for individual variations. This gives you a more reliable view of your performance by minimizing the impact of unusually high- or low-value customers.

For example, an LTV:CAC ratio of 3:1 means that for every dollar your business spends on marketing, you earn three dollars in revenue.

Calculating your LTV to CAC ratio

1. Calculate LTV
2. Calculate CAC
3. Divide LTV by CAC

Now that you’ve gathered all your metrics, you can calculate how well your marketing dollars are translating into revenue using an LTV:CAC ratio.

1. Calculate LTV

You can estimate your LTV based on the following information:

• How often customers typically order from you

• Their average order value

• How long they typically remain with you as a customer

People sometimes calculate LTV using margin or profit, but for this article, we’ll base it on gross revenue, which is the standard for ecommerce and software-as-a-service (SaaS) businesses. To find your LTV, use the following formula:

LTV = Average purchase value × Average purchase frequency × Average customer lifespan

If you determine that the average value of purchases for customers is $50, these customers make an average of four purchases per year, and they stick around for three years, your LTV would be $600.

If your business is new, make a conservative assumption about customer lifespan based on early patterns or industry benchmarks. For example, if most repeat customers return within six months, you might start with a one-year lifespan and refine it as you gather more data.

In Shopify, you can easily track LTV in the Reports section of your admin. You can also use Google Analytics or third-party tools like Littledata. There’s also a range of AI-enhanced tools that automatically track metrics like average order value, purchase frequency, and customer lifespan.

2. Calculate CAC

CAC is easier to determine than LTV. It involves calculating your total sales and marketing expenses, from advertising to automation tools and salaries—information you’re probably already tracking for budgeting purposes. Here’s the formula:

CAC = (Total ad spend + Sales expenses) / Number of new customers acquired

For example, if you spent $20,000 on marketing campaigns and acquired 100 new customers, your CAC is $200.

3. Divide LTV by CAC

The final step is to find your LTV to CAC ratio:

LTV:CAC = LTV / CAC

In this case, $600 divided by $200 gives you a LTV:CAC ratio of 3:1.

That 3:1 ratio indicates your sales and marketing costs are balanced against the revenue generated from your customer base. 

What is a good LTV to CAC ratio?

So, what is a good LTV:CAC ratio? Typical ratios vary depending on a variety of factors, including:

• Business model and stage

• Customer groups

• Marketing channels

• Industry

• Gross margin

• Repeat purchases

• Customer retention

SaaS businesses aim for a ratio of at least 3:1, while ecommerce businesses typically see ratios between 3:1 and 4:1. For virtually any business type, however, a ratio of 2:1 or less may indicate you’re close to break-even.

To be profitable, your LTV needs to comfortably exceed CAC, because CAC doesn’t factor in other costs, like overhead and cost of goods. For example, let’s say a customer generates $300 in revenue over their lifetime. If your gross margin is 50%, that leaves you with $150. If your CAC is $50, your LTV:CAC ratio is 3:1—a healthy benchmark, leaving you room to cover other costs like overhead and cost of goods.

But what if your LTV:CAC ratio is sky high, at 10:1? Believe it or not, your ratio can be too high. This can point to underinvestment in marketing or other customer acquisition strategies. Too high an LTV:CAC ratio suggests you’re not growing as fast as you could be. Of course, this depends on your operations and goals. For example, if you’re building a waitlist or prioritizing profit over growth, a very high ratio can be OK. 

How to improve your LTV to CAC ratio

1. Improve customer retention
2. Monitor churn and reorder rates
3. Acquire customers more efficiently
4. Focus on quality over quantity

Optimizing your LTV:CAC ratio means either increasing customer lifetime value or reducing customer acquisition cost. Ideally, you’d do a bit of both, but depending on where your business is, focusing on one may be more appropriate:

1. Improve customer retention

The best ways to improve customer retention are by delivering excellent customer service and offering a great product. But consider other levers, too: introducing loyalty programs, subscription offers, or bundles. Personalized marketing and timely email campaigns can encourage repeat purchases, while building trust through a consistent brand experience can create more loyal customers who make more frequent purchases.

Understand how long customers continue buying from your store. For most ecommerce businesses, this means measuring the time between the first and last purchase. It also helps to track customer cohorts—groups whose first purchase occurred in the same period, like summer or the holidays—and monitor the frequency of their subsequent purchases. 

2. Monitor churn and reorder rates

For subscription businesses, customer churn rate refers to the rate at which customers stop buying from your store over time. Reducing churn is a key component of increasing lifetime value. 

Healthy subscription businesses typically aim for a monthly churn rate of 2% to 4%. For single-purchase businesses, customers don’t “churn”; rather, they simply don’t reorder. A healthy benchmark to strive for is a 50% reorder rate, unless your business sells high-ticket, one-time items. 

Churn reduction strategies include:

• Improving the first-purchase experience. Ensures customers feel satisfied and confident in their purchase, making them more likely to return to your business. 

• Providing stellar customer support. Resolves issues quickly and builds trust, reducing the chance customers leave frustrated.

• Launching a winback campaign. A customer winback campaign re-engages those who’ve stopped buying, turning lost revenue into renewed sales.

3. Acquire customers more efficiently

Acquiring customers more efficiently means optimizing your marketing channels to maximize effectiveness. You might focus on low-cost channels like email, SMS, and content marketing. You can also reduce costs by using data-driven targeting and segmentation to eliminate wasted ad spend. Try:

• Identifying your highest LTV customer segments. Focus your marketing on customers who bring the most long-term value to improve return on investment (ROI).

• Segmenting your audience by acquisition channel performance. Allocate budget to the most effective channels and reduce wasted spend.

• Leveraging customer data platforms. Tools like Triple Whale unify your data to help you better target, predict churn, and personalize marketing for higher efficiency.

4. Focus on quality over quantity

A focus on the quality, rather than the quantity, of customers can also lead to improved customer retention. Refine your ad targeting by segmenting your customer base to identify your most profitable customers, then use lookalike audiences to reach similar, high-value prospects.

Personalize your messaging to attract loyal customer groups, rather than one-time buyers. This can include timing social retargeting with smart recommendations or running loyalty programs.