The CLV:CAC Ratio: Your business model health check
This single metric tells you whether your customer acquisition is sustainably profitable.
The CLV:CAC Ratio (also called LTV:CAC) is the central metric for sustainable profitability in e-commerce. It answers a simple but crucial question: How much do you earn from a customer compared to what it costs to acquire them?
The magic number 3:1
A CLV:CAC Ratio of 3:1 is considered the gold standard. This means: For every dollar you invest in customer acquisition, you generate three dollars in customer value. At this ratio, there's enough margin left after all costs for growth and reinvestment.
A ratio below 1:1 is a warning sign. But a very high ratio above 5:1 should also give you pause, as it might mean you're underinvesting in growth.
Two levers for optimization
The CLV:CAC Ratio can be improved in two ways:
- 1 Increase CLV: Through better customer retention, higher purchase frequency and increased Average Order Value. More on the CLV page.
- 2 Reduce CAC: Through marketing channel optimization, better conversion rates and focus on organic acquisition. Details on the CAC page.
When is a lower ratio acceptable?
In certain situations, a lower CLV:CAC Ratio can be strategically sensible:
- Growth phase: Startups and scale-ups often invest aggressively in market share
- New markets: Entering new regions requires higher acquisition costs
- Brand building: Long-term investments only pay off later
Cohort analysis for real insights
The average CLV:CAC Ratio often hides important differences. Analyze the ratio by cohorts: Which acquisition channels bring the most valuable customers? Which campaigns have the best ratio? These insights enable targeted budget allocation and sustainable growth.