Use This Metric To Scale Your Business: LTV/CAC

This post is Part 1 of my Metrics for Scale series, where I break down the key numbers every operator and investor should track if they want to see sustainable growth.

Let’s dive in.

Most business owners ask:
“How can I reduce my marketing spend?”

Smart business owners ask:
“How much more can I afford to spend to acquire the right client?”

That question is at the heart of one of the most powerful growth metrics used by high-performing companies.

It’s actually not one metric, but a ratio of two metrics.

The ratio is LTV/CAC. 

That is customer Lifetime Value divided by Customer Acquisition Cost (LTV/CAC).

I prefer using a minor variation of this metric, which is Lifetime Gross Profit (LTGP) divided by Customer Acquisition Cost (CAC).

It’s a common metric used in Software businesses – and I’ll explain why its so powerful and relevant for service businesses.

Lifetime Value (LTV) is the total revenue a business expects to generate from a customer over the course of their relationship.

The metric helps companies understand customer profitability and justify acquisition costs.

However, Lifetime Gross Profit (LTGP) is a better metric because it accounts for gross margins. This provides a clearer picture of actual profitability.

Two companies may have the same LTV, but if one has higher costs to service customers, its actual profit is lower.

LTGP ensures businesses focus on truly profitable customer relationships.

It is a more accurate and meaningful measure for profitable long-term growth.

It’s also more practical to use for product and service businesses (as opposed to software, which has 80%+ gross margins).

I’ll use LTV and LTGP interchangeably. Just know when I say LTV, I mean gross profit and not revenue.

Customer Acquisition Cost (CAC) is the total expenses made to acquire a customer.

The relationship between how much it costs to acquire a customer, and how much you make out of that customer is important.

The larger the LTGP/CAC number:

· The more money you have left over to cover operating expenses and have as profits.

· The more money you have to spend on acquiring another customer.

The second point is really important because marketing costs are (and will) only keep going up.

Most small businesses are inefficient at acquiring profitable customers.

Larger businesses know how to price their offers and retain customers well.

Take Starbucks as an example.

They have a customer lifetime value of $14,099!

They can outspend any other local coffee store to acquire a customer – and they do.

As a business owner, it’s not enough to focus on making your marketing efficient. That’s just one part of the equation. There’s a limit to how much you can optimize CAC.

To truly grow, you need to structure your services to earn more from every customer. And not just at the point of sale, but throughout their entire lifetime doing business with you.

To increase lifetime value, you need to:

• retain your customers for longer, and / or

• increase your prices, and / or

• sell them more things

When you do that, everything changes:

• You can afford to spend more to acquire better customers.

• You can reinvest profits into attracting top-tier talent.

• You can scale with confidence, knowing each new client contributes more to growth.

This is how smart businesses create momentum:
More value per client → better customer acquisition → stronger team → faster growth.

Rinse and repeat.

LTGP/CAC is one of those metrics that looks simple but can reveal a lot about how a business actually creates value.

In part 2 of Metrics For Scale: I’ll dig into how LTV/CAC goals should change for different business models.

I’d love to hear how small business owners calculate LTV and how they’ve used them. If that sounds like you, send me an email or write to me on LinkedIn.