Mastering the LTV to CAC Ratio: 5 Key Metrics to Increase Profitability

Reading Time: 2 min read

1. LTV (Lifetime Value) to CAC (Cost of Acquiring a Customer) ratio: This ratio is crucial to understanding the profitability of a business. It shows how much money a business makes from each customer, relative to the cost of acquiring that customer.
2. Lifetime Gross Profit: The lifetime gross profit is the money made from each customer, minus the cost of goods sold (COGS). It's the profit earned from each customer over their lifetime.
3. Cost of Acquiring a Customer: CAC is the cost of acquiring each new customer. It includes the costs of advertising, sales, and marketing.
4. Five Key Metrics: To understand your LTV to CAC ratio, you need to know:
   • Lifetime Gross Profit (LGP)
   • Cost of Acquiring a Customer (CAC)
   • Cost of Goods Sold (COGS)
   • Conversion Rate (CR)
   • Show Rate (SR)
5. How to Increase LTV:
   • Increase the price of your product or service
   • Decrease the cost of goods sold
   • Get customers to buy more frequently
   • Cross-sell or up-sell related products or services
   • Down-sell or offer a smaller version of your product or service
6. How to Decrease CAC:
   • Improve the efficiency of your advertising and marketing efforts
   • Increase show rates (SR) and conversion rates (CR)
   • Reduce waste and optimize funnel stages
   • Improve the quality of your offer and marketing message
7. Building Business Advantage: The LTV to CAC ratio is a key driver of business growth and profitability. By optimizing this ratio, businesses can increase their profitability and scale more efficiently.
8. Key Takeaways: To grow your business faster, focus on increasing LTV and decreasing CAC. Learn to calculate LTV to CAC ratio and apply it to your business to make data-driven decisions.

Source: Business Owners You Need To Know This Number, Alex Hormozi