LTV-CAC ratio: Why it matters for your business

For any business, financial viability and focusing on profits are crucial to meet goals and be successful in the long run.

How do you measure your level of profitability? 

There are several ways to assess your finances and determine your profits. The most important one is your LTV-CAC ratio, a metric that compares the cost of acquiring a customer to their lifetime value.

Before we explore what the LTV-CAC ratio is, how it works, and why it matters for your business, let’s look at what LTV and CAC mean as individual metrics.

What is LTV?

Lifetime value (LTV or CAC) is the estimated revenue that a customer will bring to your store within the entire duration of their relationship with your company, from their first to their final purchase.

Check out this article to learn how to calculate the customer lifetime value for your business.

What is CAC?

Customer acquisition cost (CAC) is the amount of money it will cost you to acquire a new customer. This metric includes costs such as marketing, sales, online presence, and any other expenses that you invest in to attain new customers.

LTV vs CAC

While these metrics are both important to evaluate your profits, they’re distinct in some crucial regards:

• LTV is a source of revenue — the lifetime value of a customer to your business, while CAC is an expense — the cost it takes to acquire a customer.
• Your goal is to increase LTV and reduce CAC.
  

What’s a good LTV-CAC ratio?

When the total cost of acquiring new customers is well below their total lifetime value, it’s a sign of profitability. And when the total cost of acquiring customers outweighs their total lifetime value, it’s a sign of poor financial health. In this case, you have to re-evaluate your marketing strategies for new products or offerings.

For many industries, a 3:1 ratio of LTV and CAC is viable. This means that the lifetime value of a customer is three times the cost to acquire them. This may vary depending on your industry, the costs you account for, and many other factors.

Why is a 3:1 ratio important?

In theory, anything higher than 1:1 could generate profit. But outside of customer acquisition costs, your company likely faces other expenses.

Many companies consider 3:1 as a success metric. But this ratio can vary by several factors like industry and market. It’s important to factor in your circumstances and even your business model when determining your successful LTV-CAC ratio.

‍Strategies to improve your LTV

Here are a few strategies to improve your customer lifetime value and build lasting customer relationships:

Offer product variants:‍

Providing several product variants or services opens your business to a broader market, ensuring that you’re able to generate enough revenue to outweigh acquisition costs. More diverse offerings mean you have larger profit margins.

Here’s an example from Carol's Boutique app where you can see product variants in sizes and colors.‍

To help you enhance your LTV-CAC ratio, let’s look at a few proven strategies to optimize individual metrics - improving LTV and reducing CAC.

Improve customer experiences with your brand:

Another way to enhance lifetime customer value is by improving customer experience through personalization. This may mean product recommendations, relevant push notifications, and hosting live sessions to increase customer engagement. Enhancing customer service by seeking feedback to improve products and offerings and honing your delivery process also helps improve the shopping experience.

Read this article if you want to learn more about how you to improve customer experience with personalization.

Reward customers for their loyalty:

Incentivizing customer loyalty can be an effective way to drive engagement and repeat purchases, which can lead to a higher customer lifetime value. There are a range of approaches you might take to incentivize loyalty, including:

• Offering reward programs
• Coupons and discounts for VIP customers, and 
• Loyalty programs

In addition to these strategies, if you want to know how you can adopt 8 other creative ways to increase your customer lifetime value, check out this article. 

Strategies to reduce your CAC

Here are some strategies that you can consider to reduce your customer acquisition costs:

Hone in on your marketing strategies:

Adopt omnichannel marketing strategies to create a wholesome shopping experience for your customers. Do A/B tests for your campaigns to determine which strategies are the most effective. Here are a few ways to optimize your marketing efforts to increase conversions and reduce your CAC:

• Analyze your customer behavior to understand their shopping patterns and interests. You can do this with tools like Firebase Analytics. 
• Next, use marketing automation tools to segment your customers based on their behavior and send targeted, personalized messages through push notifications, emails, or SMS. 
• Track the campaign performance with metrics like click-through rates (CTR), sales, and the best time and day to yield maximum conversions. 

Vajro enables you to create an omnichannel approach through integrations with Firebase Analytics and marketing automation tools like Klaviyo and WebEngage. 

Here’s the kicker: With a mobile app, you own your first-party data. 

That makes it super easy to track and understand customer behavior within your app and create a truly personalized shopping experience for them.

Increase your brand credibility through loyal customers:

Reduce your CAC by making the most out of your loyal customers. Consider encouraging them to leave reviews about your products through simple notifications or incentives. Show off your positive reviews on your website and app. Social proof is a great way to attract more customers with less effort. 

Look at how Vintage Boho Bags boutique shows off their 6,000+ reviews on their app’s homepage.

Engage your loyal customers through a mobile app:

A mobile app helps you engage and retain your loyal customers for life. When you direct your marketing efforts towards your app, the returns are likely to be higher because a mobile app guarantees more conversions than mobile websites. 

With a mobile app, you own the first-party data, meaning you can understand your customer behavior better and engage them through push notifications, in-app messages, and live selling on their favorite device. 

A mobile app makes shopping easier and more fun. Consider offering app-exclusive benefits to increase customer engagement and encourage first-time visitors to keep coming back for more. The more they shop, the lesser their overall CAC. 

Shop CCB boutique, who built their app with Vajro, does a great job with offering their app users exclusive discounts and offers. Take a look at their homepage design:

Optimize your LTV-CAC with a mobile app

How each business addresses their LTV-CAC ratio can differ. For some industries, a 3:1 ratio is generally considered viable, yet for others, this may be higher or lower. 

If you’re looking for ways to enhance the LTV-CAC ratio for your business, don’t hesitate to try Vajro, an app builder for mobile loyalty on the Shopify marketplace. With Vajro’s powerful drag-and-drop interface, configuration is a breeze. With a range of powerful features and useful integrations, you can customize and personalize your mobile shopping experiences. If you’re ready to learn more or get started, try it for free or book a demo today!

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