biz-cac-ltv

CAC and LTV Analysis

Overview

CAC (Customer Acquisition Cost) and LTV (Customer Lifetime Value) are the two fundamental unit economics metrics. Together they answer: "Does each customer generate more revenue than it costs to acquire them?" The LTV:CAC ratio is the single most important indicator of marketing efficiency and business model viability.

When to Use

Trigger conditions:

• User evaluating marketing spend efficiency
• User asks "what's each customer worth?" or "are we spending too much on marketing?"
• User assessing business model viability or fundraising metrics
• User needs to allocate budget across acquisition channels

When NOT to use:

• For product pricing decisions → use Pricing Strategy
• For customer segmentation → use STP or RFM
• For comprehensive financial analysis → use financial ratios

Framework

IRON LAW: LTV:CAC > 3 for Healthy Business

LTV:CAC ratio must be at least 3:1 for sustainable businesses.
- < 1:1 = You're LOSING money on every customer
- 1-3:1 = Unsustainable unless you can reduce CAC or increase LTV
- 3-5:1 = Healthy
- > 5:1 = Potentially underinvesting in growth (leaving market share on the table)

This ratio applies to the BLENDED average. Individual channels can be
below 3:1 if the overall blend exceeds it.

IRON LAW: CAC Must Include ALL Acquisition Costs

CAC = Total marketing & sales spend / Number of new customers acquired

"Total spend" includes: ad spend, marketing team salaries, sales team
salaries, tools, content production, events — EVERYTHING spent to acquire
customers in that period. Excluding salaries or tools understates true CAC.

Step 1: Calculate CAC

Basic formula:

CAC = Total acquisition spend in period / New customers acquired in period

By channel:

CAC (Channel X) = Spend on Channel X / Customers from Channel X

Include in total acquisition spend:

• Advertising (digital + offline)
• Marketing team compensation
• Sales team compensation (for B2B)
• Marketing tools and software
• Content production costs
• Events and sponsorships
• Agency fees

Step 2: Calculate LTV

Simple formula:

LTV = ARPU × Gross Margin % × Average Customer Lifespan

Where:

• ARPU = Average Revenue Per User per period (monthly or annual)
• Gross Margin % = (Revenue - COGS) / Revenue
• Average Customer Lifespan = 1 / Churn Rate

Cohort-based (more accurate): Track actual revenue per customer cohort over time. Sum cumulative revenue per customer, apply gross margin.

Step 3: Calculate Key Ratios

Step 4: Segment Analysis

Calculate CAC and LTV by:

• Channel: Which acquisition channels are most efficient?
• Customer segment: Which segments have highest LTV:CAC?
• Cohort: Is LTV improving or degrading over time?

Step 5: Optimization Strategies

To reduce CAC:

• Shift budget to lower-CAC channels
• Improve conversion rates (better landing pages, sales process)
• Increase organic/referral acquisition (content, word-of-mouth)

To increase LTV:

• Reduce churn (improve product, customer success)
• Increase ARPU (upsell, cross-sell, price increases)
• Extend customer lifespan (loyalty programs, switching costs)

Output Format

# CAC-LTV Analysis: {Company/Product}

## Unit Economics Summary

| Metric | Value | Benchmark | Status |
|--------|-------|-----------|--------|
| CAC (blended) | ${X} | — | — |
| LTV | ${X} | — | — |
| LTV:CAC | {X}:1 | > 3:1 | ✓/✗ |
| Payback Period | {X} months | < 12 months | ✓/✗ |

## CAC by Channel

| Channel | Spend | Customers | CAC | % of Total |
|---------|-------|-----------|-----|-----------|
| {channel} | ${X} | {N} | ${X} | {X%} |

## LTV Calculation

- ARPU: ${X}/month
- Gross Margin: {X%}
- Avg Lifespan: {X} months (churn rate: {X%}/month)
- LTV = ${X}

## LTV:CAC by Segment

| Segment | CAC | LTV | Ratio | Action |
|---------|-----|-----|-------|--------|
| {seg A} | ${X} | ${X} | {X}:1 | Invest / Maintain / Cut |

## Optimization Recommendations
1. ...
2. ...

Examples

Correct Application

Scenario: CAC-LTV for a Taiwanese B2C subscription box (monthly NT$599)

CAC calculation:

New customers in month: 300 CAC = NT$450,000 / 300 = NT$1,500

LTV calculation:

• ARPU: NT$599/month
• Gross Margin: 55%
• Monthly churn: 8% → Avg lifespan: 1/0.08 = 12.5 months
• LTV = NT$599 × 0.55 × 12.5 = NT$4,118

LTV:CAC = 4,118 / 1,500 = 2.75:1 — Below the 3:1 threshold. Need to either reduce CAC or improve retention.

Incorrect Application

What went wrong:

• CAC calculated as "ad spend / new customers" only, excluding NT$120K/month marketing team salary → True CAC is NT$1,500, not NT$1,100. Violates Iron Law: include ALL acquisition costs.
• LTV:CAC of 1.8:1 reported as "good because we're growing" → Growth at LTV:CAC < 3:1 means you're growing into larger losses. Violates Iron Law: ratio must be > 3:1.

Gotchas

• Attribution is messy: A customer who saw an Instagram ad, Googled your brand, then signed up via a referral link — which channel gets credit? Be consistent in attribution methodology (first-touch, last-touch, or multi-touch).
• Blended vs marginal CAC: Blended CAC includes all channels. Marginal CAC is the cost of acquiring ONE MORE customer. As you scale, marginal CAC typically rises (best channels saturate first).
• LTV is always an estimate: Future churn and spending behavior are uncertain. Use conservative assumptions and update with real cohort data as it accumulates.
• Payback period matters for cash flow: Even with LTV:CAC of 5:1, if payback takes 24 months, you need significant upfront capital. Fast-growing companies can die from long payback periods despite great unit economics.
• Negative churn is a superpower: If expansion revenue (upsells) exceeds lost revenue (churn), Net Revenue Retention > 100%. This means LTV grows over time — the best possible scenario.

Scripts

Run python scripts/cac_ltv.py --verify to execute built-in sanity tests.

References

• For cohort-based LTV calculation methods, see references/cohort-ltv.md
• For channel attribution models, see references/attribution-models.md