What does the LTV to CAC ratio indicate?

• A. The total cost of all campaigns
• B. The average order value
• C. It measures overall revenue
• D. Whether the value gained from new customers covers the cost to acquire them

Answer: (D)

The LTV to CAC ratio shows whether the value you expect to gain from a new customer over their lifetime covers the cost to acquire that customer. LTV is the revenue (or profit) you expect from a customer across their relationship with you, while CAC is what you spend to win that customer. When you compare them, you can see if bringing in customers is financially worthwhile. If the ratio is above 1, the lifetime value exceeds the acquisition cost, meaning you’re recouping your investment and then some; the higher the ratio, the more leverage you have. If the ratio is below 1, you’re spending more to acquire customers than you expect to earn from them, which isn’t sustainable. This metric isn’t about the total cost of all campaigns, nor about a single order value, nor about total revenue—it specifically measures whether the value from new customers justifies their acquisition cost.