LTV:CAC Ratio in E-Commerce: Calculation, Benchmarks, and Optimization

Brody Hall
By Brody Hall
Joel Taylor
Edited by Joel Taylor

Published November 29, 2021.

Glasses and paperwork next to a notepad with LTV on it

LTV:CAC ratio is a key metric to measure the sustainability of a business. Two important analysis points are used to determine this: Customer Lifetime Value (LTV) and Customer Acquisitions Cost (CAC). Both of these metrics are then employed to calculate a lifetime value and customer acquisition cost ratio.

This ratio is used for measuring the efficiency of a marketing campaign. In other words, the LTV:CAC ratio is a return on investment (ROI). It tracks how much a company makes from a customer in a set period. The average CAC and LTV vary from industry to industry, and so the benefit of using a ratio of the two reduces the scope of diversity to a more standardized benchmark.

Basically, the higher the ratio, the more sustainable the business.

How to Calculate LTV:CAC Ratio

Although it may sound complicated, the formula for the LTV to CAC calculation is rather simple. All you have to do is divide the key performance indicators (KPIs) of customer lifetime value (LTV) by the customer acquisition cost (CAC). Here’s a simple example: your business earns $1,000 per new customer, and it costs you $2,000 to acquire them. That’s a LTV:CAC ratio of $1000/$2000 = 0.5 or 1:2.

If the ratio is less than 1, like it is in this example, it means your new customers are costing you quite a significant amount to encourage them to do business with you. And therefore, it’s within your business’ best interests to find a way to lower the cost of acquiring new customers.

However, if your ratio is higher than 1:1, it is a good sign that your customers contribute more than you are spending to get them.

What Is a Good LTV:CAC Ratio?

Now you’ve used the above formula for your LTV:CAC analysis, let’s look at what range defines a good or bad ratio:

  • Less than 1:1 This amount of spending is unsustainable, and the cost of acquiring new customers is too high.
  • Approximately 3:1 This amount is widely considered the ideal target range of spending to acquire new customers.
  • 5:1 or greater This amount of spending looks great on paper. However, in most cases, it may actually show that a business isn’t spending enough on customer acquisition. Worse, a business with an LTV:CAC ratio in this range may miss out on growth opportunities.

How to Improve Your LTV:CAC Ratio

The best way to improve your LTV:CAC ratio is to increase the lifetime value of your customers. That means that you should spend more time figuring out how to incentivize spending more money on your business. A few ways to do this are:

  • Increasing your marketing and outreach efforts.
  • Getting in touch with your suppliers to bring down the cost of goods sold (COGS).
  • Offering upsell and cross-sell campaigns to increase LTV.

Conclusion

It’s hard to predict your ROI and LTV:CAC ratio when you’re starting out and you’re not sure how many customers you’ll attract or how much revenue you’ll make per customer. Thankfully, with the LTV:CAC ratio you can easily gauge where your business is thriving and identify areas that need improvement.