🤖🚀 Decoding LTV:CAC - The Economic Engine of Business

Read time: 4 mins…

Welcome back folks 🫡

This week’s Hyper Growth Blueprint covers:

• 🧠 Why you should look at your business like an investor

• 💡 Understanding LTV:CAC - the economic engine of business

• 🤖 Mega-Prompt of the Week: Calculate your LTV:CAC

Let’s go… 👇

Do you want to hold onto your business for the rest of your life?

Or are you building it with the hope to sell it one day?

Whichever camp you’re in…

…I think you should look at your business like an investor.

Why?

Because investors buy great businesses.

And great businesses are great to own.

So thinking like an investor & building it in a way that is valuable to other people…

…means you guarantee it will also be valuable to you too.

Today I want to talk about LTV:CAC

The economic engine behind every business.

LTV = Lifetime Value of a Customer

CAC = Customer Acquisition Cost

Your LTV:CAC is a critical indicator of your business.

And it’s one of the first things an investor would look at.

It is expressed as ratio (e.g. 3:1) and tells us…

Understanding your LTV:CAC is a gateway to identifying common constraints in your business.

Why you need to know your LTV:CAC

How to calculate LTV:CAC…

Let’s start with LTV (Lifetime Value)

Some businesses will calculate this using Revenue…

….but I prefer to use Gross Profit

Gross Profit = Price - Cost of Goods Sold (COGS)

LTV = Gross Profit * Number of Lifetime Purchases

Now for CAC (Customer Acquisition Cost)…

I use CAC interchangeably with CPA (Cost Per Acquisition)

CAC = Total Advertising Spend / Number of New Customers

Note: Make sure you use new customers only here (not repeat) - as we want to measure what it costs to get NEW customers only.

Plus… the value of repeat customers is already factored into LTV.

Here’s an example….

I sell headphones for £100.

The COGS are £25.

This give me a Gross Profit of £100 - £25 = £75

Over the course of a lifetime my customers buy on average 1.5 times.

(not many people buy headphones more than once, but occasionally they buy multiple for family members, gifts, replacements etc.)

This means my LTV is £75 * 1.5 = £112.5

Last year I spent £100,000 on Advertising across Meta, Google, and on TV.

I sold to total of 5,000 customers.

Therefore… my CAC is £100,000 / 5,000 = £20

Therefore my LTV:CAC is 112.5:20

Which expressed down as a ratio (112.5 / 20) = 5.6:1

Which means for every £1 spent on advertising…

…I made £5.6 in Gross Profit.

You see… it’s that easy 😉

What’s a good LTV:CAC?

10:1 is great.

In this zone you can effectively print money (and you become extremely attractive to investors).

At BOTTERS. we are currently at 6:1.

But 3:1 is what I’d say is a baseline minimum LTV:CAC.

Anything lower than this is an indicator something is wrong with your business model.

Once you’ve got your LTV:CAC… now we can set about improving it!

That’s what next week’s newsletter is all about.

That’s all for this week - I hope you found it useful.

Take it easy,

Elliott ✌🏼

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P.P.S. I enjoy writing this newsletter so much… I launched another one.

The Limitless Entrepreneur is a passion project where I write about optimising your health, energy, & productivity to build epic businesses so you can live an epic life.

It’s completely free. You can check it out here.

Mega-Prompt of the Week 🤖

The LTV:CAC Calculator

Paste this prompt into AI & it will ask you 5 simple questions.

It will use your answers & to calculate your LTV:CAC for you 👍

(NB: All you have to do is refer 2 people to this newsletter using your special link below & you will unlock permanent lifetime access to this newsletter segment.)