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The LTV/CAC ratio compares lifetime value to the cost of obtaining new customers in order to determine the profitability of customer acquisition. LTV/CAC ratio is the key indicator of your business’s probability & scalability.

• A ratio larger than 1 suggests customers appreciate your product and brand more than it costs to acquire them, which is profitable.
• A 3:1 or greater ratio is optimal, indicating that each customer brings in at least three times as much money as it costs to acquire them. This suggests a business that is scaling effectively.
• You are losing money on every consumer if the ratio is less than 1, which is unsustainable.

The effectiveness of your sales and marketing activities across the conversion funnel can be seen by tracking your LTV/CAC ratio over time, which also indicates significant patterns in your unit economics and overall financial health. By monitoring this indicator, you can optimize your tactics by making data-driven decisions like:

• Finding the most valuable client categories to concentrate your acquisition efforts on
• Allocating marketing budgets based on the value that various client segments offer
• Making the most of your marketing budget to increase the number of your most valuable clientele
• Putting strategies into practice to raise LTV, such as raising average order value and retention