How is the LTV to CAC ratio calculated?

• A. LTV divided by CAC
• B. CAC divided by LTV
• C. LTV to CAC ratio equals LTV / CAC
• D. LTV plus CAC

Answer: (C)

The main idea is to gauge how valuable a customer is compared to what it costs to acquire them. The LTV to CAC ratio is defined by dividing the lifetime value of a customer by the cost to acquire that customer. So, the ratio equals LTV / CAC. For example, if a customer’s lifetime value is $150 and it costs $50 to acquire them, the ratio is 3, meaning you get $3 in value for every $1 spent to acquire them. A ratio above 1 signals profitability on a per-customer basis, while below 1 signals you’re spending more than you gain. The option that states the ratio equals LTV divided by CAC matches this standard definition. Inverting the order (CAC divided by LTV) would give the inverse, and adding LTV and CAC would not yield a ratio at all.