Thursday, October 31, 2019

Customer Data Platform for Data-driven Business and LTV/CAC Ratio

What is the LTV/CAC Ratio?

LTV stands for “lifetime value” per customer and CAC stand for “customer acquisition cost”.  The LTV/CAC ratio compares the value of a customer over their lifetime, compared to the cost of acquiring them.
This eCommerce metric compares the value of a new customer over its lifetime relative to the cost of acquiring that customer.
If the LTV/CAC ratio is less than 1.0 the company is destroying value, if the ratio is greater than 1.0 it may be creating value, but more analysis is required. Generally speaking, a ratio greater than 3.0 is considered “good” but that’s not necessarily the case.

What is the LTV/CAC ratio formula?

Below is the lifetime value to customer acquisition cost formula:
[(revenue per customer – direct expenses per customer) / (1 – customer retention rate)] /
(# of customers acquired / direct marketing spending)

Example calculation

An eCommerce company spends $10,000 on a Google AdWords campaign and acquires 1,000 new customers.  The average revenue per customer is $50 and the direct costs of filling each order are $30.  The company retains 75% of its customers per year.
  • Customer contribution margin = $50 – $30 = $20
  • LTV = $20 / (1 – 75%) = $80
  • CAC = $10,000 / 1,000 = $10
  • LTV/CAC ratio = $80 / $10 = 8.0x