LTV:CAC is the ratio of a customer's lifetime value (LTV) to the 📝Customer Acquisition Cost (CAC) spent to win them, and it is the most important component of a 📝Financeable Equation.

A ratio above 1:1 means a customer returns more than they cost to acquire; operators and investors commonly look for 3:1 or better. Revenue streams, and therefore businesses, increase in value with a higher LTV:CAC ratio, a faster time to payback, and a higher rate of customer acquisition. The ratio is the central test of 📝Unit Economics.

There are no standard definitions of what to include in CAC or how to calculate LTV, so entrepreneurs take wide latitude in how they present the ratio to position their company in the best light. The 📝Magic Cohort, the best-performing slice of customers, is the classic distortion. A stricter version replaces revenue-based LTV with lifetime gross profit (LTGP):

Lifetime Revenue = Average Order Value / (1 - Repeat Customer Purchase Rate)

Repeat customer order rate = This months orders from repeat customers / last months total orders

Lifetime Gross Profit = Lifetime Revenue * Gross Margin

Gross margin should be the "realized gross margin." Realized gross margin is calculated when Cost of Goods Sold includes:

• Fully landed product costs
• Fulfillment expenses
• Merchant account processing costs
• Cost of inventory shrinkage
• Return processing costs
• Discounting
• Sell-through rate (in apparel and similar businesses)

Contexts

• 🏷️#dictionary
• 🏷️#finance-lexicon