The CAC is the cost of acquiring a new subscriber and CLV is the profit you make during the lifetime of an average subscriber. Hence the CLV needs to be higher than the acquisition cost (CAC), which it is when the CLV/CAC ratio is more than 1. Ideally it should be 3 or higher.

The CLV/CAC Ratio summarizes a plethora of information—including anticipated average lifetime revenue per customer, customer churn, and sales and marketing costs—into a single number that can be easily understood and used to evaluate the future prospects of your business.

How to calculate CAC (blended)

CAC (blended) = (Marketing cost + Sales cost) / New subscribers (paid + organic)

If you are running paid advertising on multiple channels; Adwords, Facebook, Email, PR, Affiliate, Referral etc., you might want to track CLV and CAC for each channel to see which channels are providing the best combined CLV and CAC value. Some channels might be more expensive but provide subscribers with higher CLV, so look at both metrics simultaneously.

How to calculate CLV:CAC ratio

For example, company X offers three different pricing options: Basic, PRO, and Advanced. The average customer lifetime varies by pricing plan.

Let me show you how to calculate the CLV of the average customer:
CLV = [($29 × 100 × 12) + ($59 × 200 × 18) + ($199 × 50 × 24)] / 350 = $1,389

This means that, on average, you can expect to generate $1,389 in revenue per customer.

CAC is simply: Total Sales and Marketing expense / # of new customers
For example, you spends $50.000 to acquire 100 new customers, their CAC would be $500 / customer.

So, putting it all together the CLTV/CAC Ratio is $1,389 / $500 = 2.78
The ideal ratio for CLV:CAC is > 3

How to calculate CLV:CAC ratio

For example, company X offers three different pricing options: Basic, PRO, and Advanced. The average customer lifetime varies by pricing plan.

A low CLV/CAC ratio

CLV is anything lower than 2, means your marketing efficiency of attracting higher value subscribers is poor and your growth will require a a lot more capital.

How to Improve Your CLA/CAC Ratio

To improve your CLV/CAC ratio, you can either:

  • increase subscription price, and the upgrade path to higher priced tiers by understanding what feature limits best motivate for upgrades.
  • Increase Customer Lifetime by optimizing onboarding and support to ensure users get maximum value out of your service.
  • Only target Ideal Client Profiles in your marketing to attract those that are the best fit for your service, which will eventually also convert better and have your clients stay longer.

How to calculate CLV:CAC ratio

For example, company X offers three different pricing options: Basic, PRO, and Advanced. The average customer lifetime varies by pricing plan.

Let me show you how to calculate the CLV of the average customer:
CLV = [($29 × 100 × 12) + ($59 × 200 × 18) + ($199 × 50 × 24)] / 350 = $1,389

This means that, on average, you can expect to generate $1,389 in revenue per customer.

CAC is simply: Total Sales and Marketing expense / # of new customers
For example, you spends $50.000 to acquire 100 new customers, their CAC would be $500 / customer.

So, putting it all together the CLTV/CAC Ratio is $1,389 / $500 = 2.78
The ideal ratio for CLV:CAC is > 3

A high CLV/CAC Ratio

CLV more than 3, means you have a clear path to growth and efficient marketing with needs less capital.

Companies with higher CLV/CAC Ratios typically have higher valuations and an easier time securing funding from investors.

How to calculate CLV:CAC ratio

For example, company X offers three different pricing options: Basic, PRO, and Advanced. The average customer lifetime varies by pricing plan.