The ratio of Customer Acquisition Cost (CAC) to Customer Lifetime Value (CLTV) is the clearest indicator of how your go-to-market investment is creating shareholder returns. Companies with high CLTV:CAC ratios enjoy a robust sales and marketing ROI. Low-ratio companies spend a small fortune to acquire customers that do not pay off.

 

The sweet spot for CLTV:CAC ratio is 3x to 5x. Less than 3x, the company is likely overspending on acquisition— destroying shareholder value because it’s not getting an adequate return on the GTM investment. More than 5x, the company is likely under-funding growth and allowing competitors to gain market share.

 

The figure below shows a company experiencing double-digit growth in revenue, total customers, and CLTV while closely managing acquisition costs. However, the CLTV:CAC ratio
reveals that the CEO is likely not funding enough growth and thereby missing opportunities to maximize shareholder return.

 

 

In this example, CLTV:CAC ratios of 6.7 and 6.9 exceed the 5x target—signaling the company is not funding enough growth.

 

If you would like help, visit The Studio, SBI’s multimillion dollar, one-of-a-kind, state-of-the-art executive briefing center. A visit to The Studio increases the probability of making your number because the sessions are built on the proven strength and stability of SBI, the industry leader in B2B sales and marketing.

 

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ABOUT THE AUTHOR

Tim Foster

Tim empowers private equity firms and their portfolio companies to leverage emerging best practices across the investment life cycle. Tim works clients from early stage due diligence, 100 day plans, post close value creation and exits.

Prior to joining SBI Tim spent the past decade in Private Equity working with B2B companies across various industries.   Earlier in his career he held various account executive and sales management roles in technology and services businesses including Lanier, SAP, and GS1.    Because of this, Tim can assess a situation through the eyes of an investor and a practitioner. Tim leverages this unique combination of experience to help private equity firms and their portfolio companies outperform their peers.

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