Customer Acquisition Cost (CAC) vs. Customer Lifetime Value (CLV)

In this article, we are going to learn What are the difference between Customer Acquisition cost (CAC) and Customer Lifetime Value(CLV).

What is Customer Acquisition Cost (CAC)?

Customer Acquisition Cost (CAC) is the total cost a business incurs to acquire a new customer. It encompasses all expenses related to marketing, advertising, and sales efforts aimed at bringing a customer to your doorstep. Calculating CAC is like taking the pulse of your customer acquisition strategy, and it’s an indispensable metric for any business.

What is Customer Lifetime Value (CLV)?

Customer Lifetime Value (LTV) is a metric that represents the total value a customer is expected to generate for a business over the entire duration of their relationship. It calculates the potential revenue a customer will bring in throughout their engagement with the company.

LTV takes into account various aspects, including:

1. Purchase History: The total amount a customer spends on products or services over their entire relationship with the business.
2. Repeat Purchases: If customers tend to make multiple purchases, the LTV incorporates these additional transactions.
3. Retention Period: The duration a customer typically stays engaged with the business. This can vary significantly between industries and businesses.

Lifetime Value (LTV) Vs. Customer Acquisition Cost (CAC)

Lifetime Value (LTV) represents the total revenue a business expects to earn from a customer throughout their relationship. Comparing LTV with CAC is crucial. If CAC is significantly higher than LTV, it may not be a sustainable business model. The goal is to have a higher LTV-to-CAC ratio, indicating that customers are bringing in more revenue than it cost to acquire them.

Customer Acquisition Cost (CAC) vs. Customer Lifetime Value (CLV)

Here we are providing you the difference between Lifetime Value (LTV) and Customer Acquisition Cost (CAC) in a tabular format:

Aspect	Customer Lifetime Value (LTV)	Customer Acquisition Cost (CAC)
Definition	Represents the total revenue a customer is expected to generate over their entire relationship with a business.	Denotes the cost incurred by a business to acquire a single customer.
Calculation	Often calculated as (Average Revenue per User or ARPU) divided by (Churn Rate) or using more complex models considering retention, margins, and discount rates.	Calculated as the total cost of sales and marketing activities divided by the number of customers acquired in a specific period.
Focus	Focuses on the long-term value and profitability of a customer over their entire lifespan as a customer.	Focuses on the short-term cost involved in acquiring a customer.
Importance	Helps businesses understand the worth of acquiring and retaining customers, guiding investment decisions in marketing, retention efforts, and customer service.	Helps in assessing the efficiency and effectiveness of marketing and sales strategies.
Relationship with CAC	LTV/CAC ratio is used to assess the health of a business model. A higher ratio indicates healthy economics as the value generated exceeds the cost of acquisition.	A lower CAC relative to LTV is favorable, as it means the business is acquiring customers at a cost lower than the value they bring over time.
Timeframe	Focuses on the entire customer lifespan, considering repeat purchases, referrals, and overall relationship duration.	Focuses on the initial acquisition phase, measuring the cost involved in acquiring a customer at a specific moment in time.