Why Your Team Needs to Track the LTV to CAC Ratio
Over the past few years, what began with Silicon Valley startups quickly became the model for direct to consumer e-commerce sites. Investors sought in e-commerce brands the same rapid growth of those early startups, pushing many of them to focus solely on short term goals like customer count and ROAS.
It’s relatively simple to get that initial purchase… to show hockey-stick growth, and we’ve seen many brands do this time and time again. Once unknown digital disruptor brands become household names, everyone references them as the gold standard. But, as we’ve also seen, rapid growth does not equate to a sustainable business model. In addition to the increase in advertising costs, companies can end up discounting heavily to acquire that first purchase from a customer. Marketing teams are looking at the business transactionally: “ROAS looks great and month over month customers are increasing!” Meanwhile, finance teams are looking at long-term profitability: “Our customer acquisition costs keep increasing, but customers are not increasing in value. We haven’t hit profitability and won’t at this rate!” These perspectives can be at odds with each other.
E-commerce brands focused solely on growing topline revenue and customer count have struggled because their teams are not aligned on the business metrics that will truly drive profitable growth. The most successful brands we’ve worked with are planning their strategy with long-term goals in mind, and using the same measurements across departments; one of the most important measurements being LTV:CAC ratio.
How to Calculate LTV to CAC
While CAC is an important standalone metric (see our article dedicated to CAC here), it’s even more meaningful when paired with Customer Lifetime Value (abbreviated as LTV or CLV). If a customer continues to be a repeat purchaser and fills their basket with a high average order value, the cost to acquire them isn’t as significant. By uniting CAC with the length of time a customer is retained, along with the value of their purchases (the Lifetime Value to Customer Acquisition Cost, or LTV:CAC ratio), marketers can analyze the health of the business at a much more strategic level and start answering questions that will impact the business in a more meaningful way:
- Which cohort of customers were the least expensive with the highest LTV? Which were the most profitable?
- How can I optimize my marketing spend to acquire those customers with the best LTV:CAC ratio?
- How do we retain a loyal and high LTV customer base?
- Is my business sustainable at its current rate?
How to Use the LTV:CAC Ratio
There are many ways to build a more personalized and profitable growth strategy, but having a baseline knowledge of your brand’s LTV:CAC ratio is a good place to start. Decile is ready to guide you with measurable steps to success including:
- Identifying customer personas and how they change in value over time
- Understanding the purchasing behaviors of high value customers
- Learning which channels your high value customers are coming in through
- Optimizing your product strategy based on personalization
- Increasing customer purchase frequency and reducing the number of customers churned or at risk
Ready to put these strategies into action? Contact Decile to schedule a demo.