[Digital Products] What is CAC, LT and LTV?
CAC is the Customer Acquisition Cost. It is the sum of the associated costs with finding and getting the attention of potential clients, and bringing them to your site, converting them into users of your web product and later, into a paying user. For example, imagine that you have only invested on Google AdWords and, on a given month, you have spent $1,000 and got 10 new clients in that month. Dividing $ 1,000 per 10, you’ll have a CAC of $100. That is, your cost for getting each client is $100.
LT is the Lifetime of your client. That is, how long on average a client is your client. This number only makes sense when you have a recurrent revenue stream. Using the previous example, let’s imagine that the LT of clients you have acquired is 20 months.
LTV is the Lifetime Value, or the value of a client while he stays as your client. It’s the revenue this client generates while still your client. Following the previous example, let’s imagine this client generates monthly revenue of $8. Multiplying the LT of 20 months by the $8 per month, gives us an LTV of $160.
In these definitions, it´s easy to see that your product will be as profitable as higher is the LT and the LTV, and that you need your LTV higher than your CAC.
In this example, we have an LTV of $ 160 and a CAC of $100, which shows that we have a profitable situation. It is necessary to follow up closely these numbers, month by month. If in a given month the LTV continues on $160 and the CAC goes up to more than $160, it’s necessary to review the client acquisition efforts. Also, you should study ways to increase the LTV, augmenting the LT and/or augmenting the monthly value.