Description
CAC is customer acquisition cost and LTV is the lifetime value per customer. The CAC:LTV ratio compares the cost of acquiring a customer versus the value that the customer will bring over their lifetime.
Example
LTV/CAC ratio must ideally be 3:1. This is to say that the company can make 3x what it would spend on customer acquisition. If LTV/CAC is under 3, it's an indicator that the company may be spending far too much on a customer that does not fetch value to the business.
Why it matters
Customer Acquisition Cost (CAC) and Lifetime Value (LTV) are important metrics for a company that follows a subscription-based business approach. CAC:LTV ratio helps a company address basic questions like what type of customers to acquire, and how much to spend on customer acquisition, and it can also help in raising funds from investors by showcasing how important the customer is to the company.