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A LTV (Lifetime Value) to CAC (Customer Acquisition Cost) ratio of 1 to 1 indicates that you are spending too much on customer acquisition. In other words, the cost to acquire a new customer is equal to the revenue that customer is expected to generate over their lifetime. This is not an ideal situation as it suggests that there is no return on investment from the customer acquisition efforts.
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First - to evaluate the efficiency of any marketing effort, you need to calculate the ratio between your customer acquisition costs and the lifetime value of your customer. This slide lists the ideal LTV to CAC ratio, which is 3 to 1. So for a cost of $10, the new user should bring in $30 of revenue. This is the 'goldilocks' zone to acquire new customers. If you get a ratio of 1 to 1, it means you are spending too much. But a ratio of 5 to 1 means you're spending too little on growth in favor of margin, and you can actually spend more to gain new customers. The chart below the ratio formula links to a spreadsheet, and the dial can be rotated manually as the ratio changes over time. (Slide 5)
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Do you spend too much time and energy to acquire new customers? Our Customer Acquisition Toolbox can help track and manage customer acquisition costs....
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