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.
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