CEOs can guide the decision-making required to increase enterprise value by comparing customer acquisition cost (CAC) to customer lifetime value (CLTV). Focusing on the CAC:CLTV ratio enables you to reduce churn, boosting customer satisfaction and share of wallet.
In particular, the CAC:CLTV ratio enables product, marketing, and sales teams to target customers who bring in the most revenue in the shortest amount of time. By monitoring this one metric, CEOs can quantify the impact being made on enterprise value and improve topline revenue for years to come.
What is CAC:LTV?
Customer Acquisition Cost (CAC) is the total amount of money spent on customer acquisition (sales, marketing, etc.) divided into the total number of customers acquired. If you spend $1,000 to acquire 10 customers, your CAC is $100.
Customer Lifetime Value (LTV or CLTV) is the total amount of lifetime revenue generated from a customer. If you have a customer who spends $100 a year with you for three years, your LTV is $300.
Using the two examples above, your ratio would be 3:1, or 3x LTV to CAC.
Simply put, LTV needs to be higher than CAC.
Why is this the ultimate metric?
If your ratio is too high (>5:1), you’re potentially leaving market share and revenue on the table. Too low (LTV<2:1) and you might be using ineffective or expensive channels to acquire and retain customers.
Customer churn can significantly impact CAC:LTV as well. If you have 5,000 customers and 5 percent churn, you have to sell 250 new customers each year just to remain flat. Can your sales team keep up with this?
Getting this right means higher valuation, increased stock price, and increased company value.
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