A metric often used as a rule of thumb to evaluate a firm’s performance, with 3:1 set as a good benchmark. Despite its name, it is more accurately defined as the ratio between the Average Customer Lifetime Value (ACLV) of customers acquired in a certain period and the average Customer Acquisition Cost for that same period.
It is calculated dividing the Average Customer Lifetime Value (ACLV) of customers acquired in a certain period by the average Customer Acquisition Cost for that same period.
It is very useful to keep track of this metric performing cohort analysis for customers acquired in different periods, so you can track how your performance is evolving.
It is usually estimated that a LTV-to-CAC ratio around 3:1 is optimal. This means that for every dollar you are spending in sales and marketing, you are generating 3 dollars worth of value for your company.
Low values (for example around 1:1) may indicate that your Go-to-Market is not scalable, because you are spending too much acquiring new customers.
High values (for example around 5:1) may indicate that you are leaving money on the table and could spend more in sales and marketing to grow faster. Example:
- Last month, your Customer Acquisition Cost has been €150’000
- The ACLV for the customers you acquired last month is €400’000
- Your LTV-to-CAC Ratio is €400’000 / €150’000 = 2.67