Lifetime Value (LTV, or sometimes it's called CLV, Customer Lifetime Value): The total amount of revenue that a customer is expected to generate for a business over the entire duration of their relationship. LTV is a key metric for businesses, as it helps them understand the long-term value of a customer and make strategic decisions such as how much to spend on customer acquisition. LTV can be calculated by multiplying the average purchase value by the number of purchases per customer per year and then by the average customer lifespan. Businesses can use LTV to prioritize their marketing and sales efforts, as well as to identify high-value customer segments for targeted investments.
Customer Acquisition Cost (CAC) and Lifetime Value (LTV) are closely connected, as they both provide important information about the cost and value of acquiring and retaining customers. CAC measures the cost of acquiring a new customer, while LTV measures the total revenue that a customer is expected to generate over their lifetime.
In order for a business to be profitable, the LTV of a customer should be greater than the CAC. This means that the revenue generated from a customer over their lifetime should be greater than the cost of acquiring that customer. If the LTV is less than the CAC, the business will not be able to sustain itself in the long run.
By comparing CAC and LTV, businesses can understand the efficiency of their customer acquisition and retention efforts, and make strategic decisions about how to allocate resources. A high LTV and low CAC means that the business is acquiring customers at a low cost and that these customers are generating significant revenue over their lifetime. This is generally considered to be a desirable outcome. On the other hand, a low LTV and high CAC means that the business is spending too much to acquire customers and these customers are not generating enough revenue over their lifetime. This is generally considered to be an inefficient outcome and should be addressed by the business.
Overall, CAC and LTV are two important metrics that provide insight into the cost and value of acquiring and retaining customers. By understanding and optimizing these metrics, businesses can make data-driven decisions to improve their customer acquisition and retention efforts and ultimately drive growth.