When it comes to digital marketing, two of the most important metrics for understanding return on investment are Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV). Together, they show you how much it costs to win a customer and how much revenue that customer is likely to generate over time.
At Stellar Digital Media we work with businesses to track, analyse, and optimise these numbers so you are not just getting more customers, but the right customers with the highest long term value.
What is Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) is the total spend required to acquire a new customer. It includes marketing spend, ad costs, salaries for your sales and marketing teams, tools, and any other expenses tied to bringing in a new lead or client.
The formula is straightforward:
CAC = Total marketing and sales costs ÷ Number of new customers acquired
A lower CAC means your marketing is more efficient. But focusing only on reducing cost can be misleading, sometimes paying more to acquire higher-value customers is a smarter long term play.
What is Customer Lifetime Value (LTV)?
Customer Lifetime Value (LTV) is the projected revenue a business can expect from a single customer throughout their relationship with your brand. It takes into account repeat purchases, subscription length, upsells, and referrals.
The formula looks like this:
LTV = Average purchase value × Number of purchases per year × Average customer lifespan
By tracking LTV, you can see whether your customers are worth the cost of acquisition and how much you can realistically invest in marketing to bring in new ones.
Why CAC and LTV Should Be Measured Together
Looking at CAC and LTV in isolation does not give the full picture. When paired, they reveal whether your customer acquisition strategy is profitable.
For example:
- If your CAC is $100 and your LTV is $1,000, you are in a strong position.
- If your CAC is $300 but your LTV is $250, you are losing money.
The goal is to create a healthy LTV to CAC ratio. A common benchmark is 3:1, meaning you should aim for customers who generate at least three times more revenue than what you spent to acquire them.
How to Improve CAC and LTV
At Stellar, we help businesses optimise both sides of the equation:
- Improve CAC:
- Use highly targeted campaigns (see our Paid Ads Services)
- Refine your audience through data and analytics
- Optimise your website for conversions (How do I build a website that converts leads?)
- Boost LTV:
- Implement email automation for repeat sales (Email Marketing Services)
- Create loyalty programmes and referral incentives
- Deliver exceptional customer experiences that build retention
Why CAC and LTV Matter for Strategy
Knowing your CAC and LTV allows you to make smarter budget decisions. You will know exactly how much you can afford to spend on campaigns without guesswork. It also highlights which channels deliver the best customers, not just the cheapest leads.
This is where our team thrives, combining data analysis, creative strategy, and hands on execution to ensure your marketing spend is both efficient and profitable.
FAQs
- Q: What is a good CAC to LTV ratio?
A: A common benchmark is 3:1. This means the revenue generated from a customer should be at least three times higher than the cost of acquiring them. - Q: How do you calculate CAC?
A: Divide your total marketing and sales expenses by the number of new customers acquired in a set period. - Q: Why is LTV important in digital marketing?
A: LTV helps you understand the long-term revenue potential of each customer, guiding how much you can invest in acquiring and retaining them. - Q: How can I lower my CAC?
A: Refine your targeting, improve ad performance, optimise your website for conversions, and ensure your sales process is streamlined.