Arguably the most important operating metric of any subscription business is the LTV:CAC ratio.
Lifetime Value (LTV), sometimes referred to as customer lifetime value, is the average revenue a single customer is predicted to generate over the duration of their account.
Customer Acquisition Cost (CAC) is the average expense of gaining a single customer.
The ratio of lifetime value to customer acquisition cost helps you determine how much you should be spending to acquire a customer and the potential of a subscription business. Calculating this ratio will show if you’re spending too much per customer or if you’re missing opportunities from not spending enough. You want to make sure that the lifetime value of a subscriber exceeds that of the cost to acquire them.
An ideal LTV:CAC ratio should be 3:1. The value of a customer should be three times more than the cost of acquiring them. If the ratio is close i.e.1:1, you are spending too much. If it's 5:1, you are spending too little.
Watch the video below to get a better understanding of how to calculate LTV:CAC ratio.
We offer an LTV:CAC calculator in Module 5 of the Value Builder Engagement, whereby entering the business data it will calculate for you.