LTV:CAC Ratio

Weekly Accounting focuses on the most important metric in business: the ratio between what it costs to acquire a customer (CAC) and how much that customer contributes to the business over its lifetime (LTV).

Revenue streams (and therefore businesses) increase in value with:

• Higher LTV:CAC ratio
• Faster time to payback
• Higher rate of customer acquisition
• Demonstrated consistency of related cash flows over long periods of time.

There are not any standard definitions of what to include in CAC and how to calculate LTV so naturally, entrepreneurs take wide latitude in how they present this ratio to position their company in the best light. (See the  Magic Cohort.)  

It’s is this ambiguity that caused us to rename LTV to LTGP or Lifetime Gross Profit at Assembled Brands.

Lifetime Revenue = Average Order Value / (1- Repeat Customer Purchase Rate)Repeat customer order rate = This months orders from repeat customers / last months total ordersLifetime Gross Profit = Lifetime Revenue * Gross Margi

Gross margin should be the “realized gross margin”.  Realized Gross Margin is calculated when the Cost of Goods Sold includes:

• Fully landed product costs
• Fulfillment expenses
• Merchant account processing costs
• Cost of inventory shrinkage
• Return processing costs
• Discounting
• Sell through rate (in apparel and similar businesses)

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