4.6 CLV vs CAC (Customer Lifetime Value vs. Acquisition Cost)

Two key marketing metrics are Customer Lifetime Value (CLV) and Customer Acquisition Cost (CAC).

• CAC is the average cost to acquire a new customer. It includes all marketing and sales expenses (ads, promotions, sales staff, etc.) divided by the number of new customers in a period. For example, if you spent $1,000 on ads last month and gained 50 new customers, your CAC is $20 per customer.
  
  

• CLV is the total profit (or revenue) you expect to earn from one customer over the entire duration of their relationship with your business. If a customer pays $100 per year and stays for 5 years, and your profit margin is 20%, then that customer’s CLV might be $100×5×0.20 = $100. A simple formula is:
  CLV=(Annual revenue per customer×Years as customer)−CAC
  For example, if that customer brought in $500 over 5 years and cost $100 to acquire, CLV ≈ $400.
  
  

The relationship between CLV and CAC is crucial. Ideally, CLV should be significantly higher than CAC. That means each customer generates more profit than it cost to get them. If CAC exceeds CLV (you spend $50 to get a customer who only ever pays you $30), the business will lose money. Many experts suggest aiming for CLV at least 3× CAC. Tracking these helps decide marketing budgets. For instance, if you lower CAC (cheaper ads) or increase CLV (through repeat sales or upsells), your business becomes more profitable. In short, you want to acquire customers cheaply and keep them spending to maximize the gap between CLV and CAC.