How this number is made
The ratio of lifetime value to acquisition cost is a slogan until both numbers are measured the same way. A ratio of 3 is often repeated as a target. It is not a law. If the lifetime value is undiscounted and the acquisition cost is paid today, the ratio flatters the business.
- Use a lifetime value that does not already subtract the acquisition cost.
- CAC is spend divided by new customers, for the same kind of customer.
Formula
Ratio = lifetime value ÷ acquisition cost.
Worked example
With the figures already in the form, ltv divided by cac is 6.33.
Questions
Is 3 the right target?
It is a venture-blog rule of thumb. A business with fast payback can live at a lower ratio. A business with slow payback may need a higher one.
What is payback?
How many months of gross profit it takes to earn the acquisition cost back. The payback page on this site is the capital version of that idea.