Quiz Answer to:
21
LTV to CAC Ratio
Q)
Assume that for a new startup, the customer acquisition cost (CAC) is $150, and the customer lifetime value (LTV) is $400. Is this ratio sustainable for long-term growth? Explain why or why not and describe what specific actions you would take to optimize this ratio to ensure profitability.
Short Answer:
To assess the sustainability of an LTV to CAC ratio of 2.67:1, consider industry benchmarks, which suggest an ideal ratio of 3:1. While the current ratio is close, it’s not optimal for long-term growth. Focus on increasing LTV by improving retention, upselling existing customers, and enhancing customer experience. Lower CAC by optimizing marketing spend, utilizing organic channels, and leveraging referral programs. Track LTV, CAC, and churn rates over time to ensure the ratio moves toward sustainability.
Detailed Answer:
Assessing the LTV to CAC Ratio
Understanding the LTV to CAC Ratio:
LTV to CAC Ratio: The LTV to CAC ratio measures how much value a customer generates over their lifetime compared to the cost of acquiring that customer. In this case, the ratio is $400 (LTV) ÷ $150 (CAC) = 2.67.
Industry Benchmarks: A good LTV to CAC ratio is generally around 3:1, meaning you should earn three times more from a customer than it costs to acquire them. At 2.67:1, the ratio is slightly below the ideal benchmark, but it is close to being sustainable.
Current Sustainability: