Question 1

What is Customer Acquisition Cost (CAC)?

Accepted Answer

Customer Acquisition Cost (CAC) is the total cost of sales and marketing efforts divided by the number of new customers acquired in a given period. It includes advertising spend, salaries for sales and marketing teams, software tools, and any other expenses directly tied to acquiring customers. A lower CAC means you are acquiring customers more efficiently.

Question 2

What is a good LTV:CAC ratio?

Accepted Answer

A 3:1 LTV:CAC ratio is the standard benchmark for healthy unit economics. This means the lifetime value of a customer is three times what it costs to acquire them. Below 1:1 means you are losing money on every customer. Between 1:1 and 2:1 margins are too thin. Above 5:1 is excellent but may indicate you are under-investing in growth and leaving market share on the table.

Question 3

How do I calculate Customer Lifetime Value?

Accepted Answer

Customer Lifetime Value (LTV) is calculated by multiplying the average revenue per customer per month by the average customer lifespan in months, then multiplying by the gross margin percentage. The formula is: LTV = Average Monthly Revenue x Customer Lifespan (months) x Gross Margin %. Gross margin is used because it reflects the actual profit generated per customer after direct costs.

Question 4

What is payback period and why does it matter?

Accepted Answer

Payback period is the number of months it takes to recoup your customer acquisition cost through gross profit from that customer. It is calculated by dividing CAC by the monthly gross profit per customer. A shorter payback period means faster cash flow recovery. Under 6 months is excellent, 6-12 months is good, 12-18 months is acceptable, and over 18 months is concerning as it ties up capital for too long.

Question 5

How can I reduce my CAC?

Accepted Answer

You can reduce CAC by implementing AI chatbots to automate lead qualification and customer support (reducing CAC by 40-60%), investing in content marketing and SEO for organic acquisition, improving conversion rates on your website, building referral programs, using marketing automation to nurture leads more efficiently, and focusing ad spend on high-intent channels with better targeting.

LTV:CAC Ratio	Rating	What It Means
Less than 1:1	Unsustainable	Losing money on every customer acquired
1:1 - 2:1	Warning	Margins too thin to sustain growth
2:1 - 3:1	Acceptable	Viable but room to improve efficiency
3:1 - 5:1	Healthy	Ideal range for most businesses
Greater than 5:1	Excellent	Outstanding, but may be under-investing in growth

Payback Period	Rating
Less than 6 months	Excellent
6 - 12 months	Good
12 - 18 months	Acceptable
More than 18 months	Concerning

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