Lifetime Value (LTV) is the average amount of money you expect to receive from a customer over the life of their relationship with you. It’s a critical metric for calculating the return on customer acquisition costs and understanding the long-term outlook of your business model.
Client Acquisition Cost (CAC) is the amount of money your business spends to get a new customer. It helps measure the return on investment of efforts to grow your clientele.
Is LTV and CLV the same?
Most of the time, Lifetime Value (LTV) and Customer Life Value (CLV) get used interchangeably, referring to the same thing. For most companies, usage of these terms will come down to preference. However — if there is a distinction — LTV will refer to the average customer lifetime value across the entire customer base, and CLV refers to the lifetime value for an individual account.
What is LTV formula?
Lifetime Value = (Average Revenue Per User x Gross Margin) / Churn Rate
Average Revenue Per Use: The average revenue per user for your customer base over a given period (e.g. one year).
Gross Margin: Your net sales revenue minus cost of revenue.
Churn Rate: The percentage of customers that stopped using your product or service in the given period.
What is a good LTV to CAC?
Average LTV and CAC will vary depending on your industry and the product or service you provide. The key is to keep your CAC lower than your LTV, otherwise, you’re spending more to get a customer than the money they bring in, making your revenue stream for that customer segment unsustainable.
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