In plain words
The LTV to CAC ratio divides a customer's lifetime value by the cost of acquiring them. A ratio of 2 means every dollar spent on acquisition comes back as two dollars of margin over the horizon.
It is a compact way to ask whether growth is worth buying. Below 1, each new customer loses money and more spend loses more. The ratio says nothing about when the money comes back, which is why it is always read next to the payback period.
Formula
- LTV to CAC = customer lifetime value over the horizon ÷ customer acquisition cost
Worked example
A coffee subscriber is worth $53.29 over twelve months and costs $30.00 to acquire. The engine puts the ratio at 1.78.
After the acquisition cost, that is $23.29 of profit per subscriber over the year, first reached in month 5.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| Cost of goods | per unit | −$12.00 |
| Pick and pack | per order | −$1.18 |
| Packaging | per parcel | −$0.50 |
| Shipping label | per parcel | −$7.50 |
| Card fee per order | per order | −$0.30 |
| Refunds | percent | −$2.00 |
| Card processing | percent | −$1.16 |
| Contribution margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
A ratio built on revenue is not this ratio
Lifetime revenue over CAC gives a figure several times higher, and it is the one most often quoted. A subscriber who pays $400 a year and costs $100 to win is said to return four to one, when the margin on that revenue may barely cover the $100. Use margin.
Using it
State the horizon with the ratio: a twelve-month ratio and a three-year ratio are different claims. Compute it per offer and per channel. And never read it alone. A ratio of 3 that takes two years to arrive can still run a growing brand out of cash.
In Offer Suite
Offer Suite's simulator reports the ratio per option and blended, as the margin a customer earns over the horizon divided by their acquisition cost.
Source: Offer Suite's offer simulator.