Customer Acquisition Cost vs. Lifetime Value (With Examples)

By Indeed Editorial Team

Updated August 23, 2022

Published September 29, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies often use multiple metrics to determine their business's costs and profits. Two important metrics are customer lifetime value (LTV) and customer acquisition cost (CAC), which help business leaders understand how their costs relate to their profits. If you're a marketing professional or business leader, you may be interested in learning how these important metrics relate to one another. 

In this article, we compare customer acquisition cost versus lifetime value by explaining their differences, describing the CAC to LTV ratio and giving examples.

Key takeaways:

  • Customer acquisition cost (CAC) measures how much a company spends on customer conversion

  • Customer lifetime value (LTV) measures the amount a company can expect to make from a single customer

  • Combining CAC and LTV to create the LTV to CAC ratio can help determine a cost-efficient business strategy

What is customer acquisition cost (CAC)?

The customer acquisition cost, also known as CAC, measures the total cost of converting people who view advertising into paying customers. CAC considers all the expenses that a company incurs in all of its marketing efforts, including the following:

  • Physical signs and billboards

  • Online advertising

  • Radio advertising

  • Phone solicitations

  • Social media campaigns

  • Marketing staff salaries

  • Advertisement design and development costs

  • Other associated expenses

To calculate CAC, companies often add all the costs of advertising, then divide the result by the number of new customers they gained. This is a formula that companies can use to calculate their CAC:

CAC = (Advertising costs + payroll costs + design costs + other associated costs) ÷ number of customers gained

Read more: Learn How To Calculate Customer Acquisition Cost

What is customer lifetime value (LTV)?

Customer lifetime value, sometimes known as CLT or LTV, is a calculation of the expected revenue a company might gain from a single customer over time, minus associated expenses.

To calculate LTV, first calculate customer value over the course of a year by taking the average revenue on their customer's orders, subtracting shipping fees, transaction costs, refunds and taxes to find profit. Then, multiply the profit by the average number of purchases from that customer during the timeframe. Finally, multiply the result by the expected lifetime of the customers. 

This formula can help calculate the LTV:

LTV = (Average transaction profit x average number of transactions) x average customer lifetime

Read more: Guide to Understanding Customer Lifetime Value (CLV)

Customer acquisition cost vs. lifetime value

CAC tells a company how much they spend on acquiring paying customers, and LVT tells them how much they can expect to profit from a customer. Here are a few more key differences between CAC and LTV:

  • CAC measures a company's costs, LTV measures its profits.

  • Companies often seek low CAC and a high LTV.

  • CAC is often a more definite metric, LTV is often an estimate.

These two measures together can tell business leaders how their profits compare with their expenses and give them ideas for improving their efficiency. For this reason, companies might combine CAC and LTV data to create the LTV to CAC ratio. This may help them better understand company operating costs and profit potential.

Read more: How To Calculate Customer Lifetime Value and Why It's Important

What is the LTV to CAC ratio?

The LTV to CAC ratio, or LTV:CAC, is the equation that businesses may use to compare their acquisition costs to their profits. Here is a guide for calculating, interpreting and understanding this metric:

LTV to CAC ratio calculation

To determine their LTV to CAC ratio, first determine the LTV and CAC values using the equations above. Next, divide the LTV value by the CAC value to find out how much a company earns in revenue for each dollar that it spends on revenue. Here is the formula for the ratio:

LTV:CAC = LTV ÷ CAC

Related: How To Perform an LTV SaaS Calculation (With Steps and Tips)

LTV to CAC ratio interpretation 

If a company's LTV:CAC is one or less, it means that the company is making less than one dollar for every dollar spent. If a business has this ratio, it may lose money and might consider lowering costs or improving customer retention to improve its financial situation. 

Many marketing professionals consider a ratio of three or higher to be ideal. This means that the value of a company's customers is three times the cost of acquiring them. If a company has a ratio higher than three, it may be very successful, but can consider spending more on advertising to increase its growth.

Related: What Is Cost Per Acquisition? (And Why It's Important)

LTV to CAC ratio importance

The LTV to CAC ratio can allow business leaders and investors to improve their understanding of a company's efficiency. Here are a few specific ways the ratio information may do so:

  • Assessing spending: Marketing professionals may maximize company profit by lowering marketing costs in response to a low LTV:

    CAC or increasing advertising to gain more business in response to a high ratio

  • Understanding customer dynamics: If a company LTV:CAC is low, they might investigate ways to improve customer retention and order value. If it's high, they gain valuable insights into their strengths as a company. 

  • Gain investors: Good LTV:CAC ratios can help companies appear stable and profitable. This may attract investors and help the company grow at a faster rate.

Related: Measuring Product Success: 7 Key Steps, Metrics and Tips

Improving your LTV to CAC ratio

Once the company you work for calculates its LTV:CAC, your team can investigate ways to improve profitability. You can do this by reducing costs and increasing profit. To reduce costs, it may be helpful to lower your CAC. To increase your profit, you can consider improving your LTV. Here are some more details about these methods:

Lowering customer acquisition cost

When lowering customer acquisition costs, it may be helpful to analyze advertising campaigns to discover which are most effective. Marketing professionals may end inefficient campaigns to save money and focus on effective advertising measures.

Increasing customer conversion rates is another great way to lower customer accusation cost, because the same conversion tactics may be effective for multiple customers, increasing the number of customers a company can gain with every dollar spent on advertising.

Here are a few tactics for increasing customer conversion rates: 

  • Improving the company website

  • Streamlining the checkout process

  • Increasing cart completion

  • Optimizing retail outlets

Related: Customer Acquisition Cost (CAC): What It Is and How To Improve It

Improving customer lifetime value

To improve a company's LTV, it's often helpful to give customers incentives and ensure that they remain aware of your products. You can consider using sales, discounts and bonus products for returning customers.

You might also consider improving the quality of your service or frequently launching new products to keep customers interested. To keep in contact with past customers, you can consider enrolling them in newsletter, email or text campaigns.

Related: How To Increase Customer Lifetime Value in 8 Steps

Calculation examples

Here are some theoretical examples to help you understand how these calculations might occur in real life:

CAC calculation example

Here's an example of how a company might calculate its customer acquisition cost:

During the past year, a company spent $100,00 on its online advertising campaigns. It has four marketing employees who each make $40,000 per year totaling $160,000 in payroll costs. The company incurred $20,000 in associated costs.

During the year, the company gained 2,000 new customers. To calculate their customer acquisition cost, company leaders add their costs and divide them by the number of new customers using these equations:

  • Advertising costs ($100,000) + payroll costs ($160,000) + associated marketing costs ($20,000) = Total advertising costs ($280,000)

  • Total advertising costs ($280,000) ÷ customers gained (2,000) = customer acquisition cost ($140)

This means that the company has an average customer acquisition cost of $140 dollars per customer.

Read more: Definitive Guide to Customer Acquisition Cost (CAC)

LTV calculation example

This is an example of how a company might calculate its average customer lifetime value:

The same company has an average order revenue of $200. To determine the average profit on an order, they subtract an average shipping cost of $20, an average transaction fee of $5, an average sales tax of $10 and an average refund amount of $25. This gives them an average transaction profit of $140 using this equation:

Revenue ($200) - [shipping ($20) + transaction ($5) + tax ($10) + refund ($25)] = transaction profit ($140)

The company's customers make an average of three transactions a year, so the marketers multiply their average profit of $140 by three, which equals $420. The company's customers have an average lifespan of three years, so they multiply 420 by three, giving them an average lifetime value of $1,260. This is the equation they used:

[Average transaction profit ($140) x average number of yearly transactions (3)] x average customer lifetime (3) = customer lifetime value ($1,260)

Related: 9 Ways a Manager Can Improve Customer Loyalty

LTV to CAC ratio calculation example

This is an example of how the same company might calculate its LTV:CAC:

Company leaders determined that their customer acquisition cost was $140. They also know that their average customer lifetime value is $1,260. To find their LTV to CAC ratio, they divide their LTV of 1,260 by their CAC of 140 using this equation:

LTV ($1,260) ÷ CAC ($140) = LTV to CAC ratio ($9)

This means that they make nine dollars for every dollar they spend on advertising, which is a very healthy rate. Company leaders may consider increasing advertising costs to gain new customers and grow their business.

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