When we analyze business growth metrics, LTV (lifetime value) and CAC (customer acquisition cost) play a central role as they reflect the revenue generated by the customer while active and their acquisition cost.
These indicators are essential for a company’s commercial and growth planning, as they quickly provide a very practical view of growth. Before we talk about the LTV/CAC ratio, we will start by analyzing each metric separately.
What is CAC and how to calculate it
CAC is the sum of all resources used by the company to acquire customers, that is, the costs of demand generation and conversion.
Since it is the sum of all resources, we say that it refers to the total cost associated with the customer acquisition process. Therefore, it includes c level executive list marketing and sales costs, such as investment in paid media, marketing campaigns, events, active prospecting, salaries and commissions, among others.
After calculating all costs, simply divide the total cost by the number of new customers obtained in the respective period.
We therefore have the following equation:
Thus, assuming a marketing cost of R$30,000 and a sales cost of R$20,000, with an acquisition of 50 customers, we have a CAC of R$1,000, that is, (30,000 + 20,000) / 50.
CAC alone can and should be monitored should a marketer be creative? historically for purposes of evolution, comparison between channels and benchmarks, but in isolation it does not provide a complete answer about the company’s growth. To do this, we need to understand LTV and its calculation.
What is LTV and how to calculate customer lifetime value
LTV (lifetime value) is the sum of the value email list delivered by the customer to your company, during their lifetime, that is, while they are active. It has different calculation methods, without an exact consensus on its concept, being possible to calculate all the revenue generated or through an exclusive metric which is the ARPU (Average revenue per user), which will be used in our calculation.
Here at Gestão em Dados, we prefer to calculate LTV considering the contribution margin. This analysis helps to understand the profitability of each unit economics, and the economic viability of the business.
ARPU = Average ticket X average number of transactions per period per customer X average number of active periods
The average number of transactions per period can be used for both one-off purchases and subscription services. In the case of services with monthly fees, the average number of transactions per period, considering a period of one year, will be 12. In an e-commerce, where the customer makes a purchase every 2 months, for example, the ARPU is the average ticket divided by 2.
It is important to note that LTV, as previously mentioned, is a metric calculated in different ways, without there necessarily being a consensus on its calculation.
Example: With an average ticket of R$350 and an average of 6 purchases per year, lasting 2 years, the ARPU is R$350 X 6 X 2, that is, R$4,200.
LTV = ARPU* (Average Revenue Per User) x % contribution margin
Assuming an ARPU of R$4,200 and a contribution margin of 25%, the LTV calculation is R$4,200 X 25%, resulting in an LTV of R$1,050.
The LTV/CAC ratio and its importance
Thus, after obtaining the two metrics, we can analyze the LTV/CAC ratio, which represents how much revenue the customer generates in relation to their acquisition effort . This relationship is important for analyzing unit economics, that is, to understand whether or not each sale is profitable given the cost structure and revenue generated.
For example, it is common for startups to make losses at the beginning, as they have high fixed costs and expenses, but it is essential that the LTV / CAC ratio is healthy. If the company does not have this healthy ratio, for each unit sold, the loss will be greater, that is, growth is a problem, since the acquisition structure exceeds the revenue obtained.