You've probably heard the term CAC-LTV ratio thrown around a lot lately, but what exactly does it mean, and how can you use it to improve your ROI? Let's break down the CAC-LTV ratio and show you how to use it to optimize your business strategy.
The CAC-LTV Ratio explained
CAC-LTV Ratio stands for Customer Acquisition Cost to Lifetime Value ratio, and it's a metric used to measure how much money you're investing in acquiring new customers compared to the amount of revenue they generate over their lifetime with your company. The CAC-LTV ratio is calculated by taking the total cost of customer acquisition (CAC) and dividing it by the customer lifetime value (LTV).
For example, if you spend $100 to acquire a new customer, and that customer generates $500 in revenue over their lifetime with your company, then your CAC-LTV ratio would be 0.2 ($100/$500). The standard for a good LTV-CAC ratio is 3:1 for DTC sellers. Now let's do some math on the easiest way for you to improve your number.
What is a good CAC:LTV Ratio for eCommerce?
Studies have shown that DTC sellers should have a minimum LTV-CAC ratio of 3:1, which means you should make 3x of what you would spend in acquiring customers.
How to improve your CAC-LTV Ratio
Let's say you're a Shopify store who sells t-shirts for $30, you can only spend $10 to generate a sale to get the coveted 3:1 ratio. And this includes all sales and marketing costs. If you're able to double your efficiency to reduce your CAC to $5, you've achieved a 6:1 CAC-LTV ratio. But if it was easy to cut costs in half, you wouldn't be reading this.
If you focused your efforts on repeat purchases and sold that same customer two shirts, you've unlocked that same 6:1 ratio. Now imagine you've implemented a loyalty program for your Shopify store and are able to sell them a third shirt for a friend. Now you have a 9:1 ratio. Sell 4, you're at 12:1...
You'd need to make your CAC $2.50 to get that same result if you focused only on cutting costs rather than growth.
How loyalty programs impact your CAC-LTV ratio
An effective loyalty program can have a massive impact on your CAC-LTV ratio because it doubles as both customer acquisition and retention. It's been proven that when done correctly, a Shopify loyalty app like Rivo can drive a 10% increase in total sales for your brand, all from existing customers who are incentivized to purchase. Loyalty programs can also help you acquire new customers with referral programs that both existing and new customers can share.
When it comes to improving your return on investment, understanding the CAC-LTV ratio is key. The best way to improve this metric is to focus on increasing customer lifetime value by offering loyalty programs that have referral rewards and incentive programs. With Rivo's loyalty platform, you can quickly and easily create a loyalty program that will help increase customer lifetime value while keeping cost of acquisition low.