As recurring income models are generalized, the ability to acquire profitable customers for a long time becomes a central issue. The ratio LTV / CAC ( Lifetime value / customer acquisition cost) Allows you to measure this efficiency., This is one of the indicators most followed by investors, especially in the Saas, E-Commerce, Fintech and Edtech sectors.
What does the LTV / CAC ratio measure?
- LTV (Lifetime Value) : average income generated by a client over the entire working life. She reflects the total economic value of a customer.
- CAC (Customer Acquisition Cost) : average cost to acquire a customer, including marketing, advertising and commercial expenses related to acquisition.
Standard formula:
LTV / CAC = customer life value / customer acquisition cost
This ratio indicates how many euros in value are generated for each euro invested in the acquisition.
Why are investors interested?
It assesses the profitability of growth
An LTV / CAC> 3 ratio generally means that the company generates sufficient customer value to cover the acquisition cost and generate an exploitable surplus. Below 1, growth mechanically destroys value.
It is a sustainable product-market indicator
A good ratio indicates that the product meets a real need, that customers remain, pay, and are potentially loyalty or monetisable in the long term.
He is precious in the investment decision
The ratio makes it possible to determine whether the company can invest more in acquisition without compromising its financial balance, and when accelerating marketing expenditure.
It is a basis for analysis of the marketing lever
A high CAC can be tolerated if the LTV is much higher, but an increasing CAC with a stable LTV is a signal for saturation or drop in efficiency.
Interpretation: What do the thresholds say?
| LTV / CAC ratio | Interpretation |
|---|---|
| <1 | Value destructive growth |
| 1 – 2 | Fragile balance, low room for maneuver |
| 3 – 5 | Standard expected in healthy growth phase |
| > 5 | High economic efficiency, ability to scaler |
Please note: a very high ratio (> 7) can also indicate a Commercial under-investment.
The points of vigilance in the calculation to have in mind
- Too optimistic customer life
The LTV is often overvalued if it is based on non -validated projections (e.g. not stabilized churn).
- Subseed cac
Do not include indirect costs (commercial wages, tools, events, content) false the ratio.
- Intermodoles comparison
An acceptable ratio in the B2C (EG 2.5) is not necessarily so in the B2B where the baskets are higher.
- LTV Brute vs. Nette LTV
LTV must ideally be net of service coststo reflect the real profitability of a customer.
How to optimize the LTV / CAC ratio
- Improve LTV
– Reduce the churn
-Set up Upsell / Cross-Sell offers
– Work satisfaction and customer retention
– Develop a loyalty program or a community - Reduce cac
– Optimize acquisition channels (SEO, Retrales, Partnerships)
– Accelerate the conversion cycle
– Automate marketing campaigns
– work the brand to lower the marginal acquisition cost
Tomorrow we will send L‘Indicator of customer love, the net returned retention
