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Comment by danpalmer | Hacker News Reader

There's no such thing as an overall average ROI.

"Good" marketing, for a B2C company, is often defined as a 3x CAC/LTV ratio and 12 month payback. That means for every $1 you spend on advertising you make $3 in gross profit, and you get back $1 after 12 months. This is fairly healthy for many businesses, but some businesses may be looking for a 1 month payback, or may be looking for a 5x LTV. It's also possible to trade off LTV and payback, the latter may be more important for a fast growing business so that they're not tying up capital, and they may not yet have enough data to accurately predict 3 or 5 year LTV anyway.

In reality though these things fluctuate all the time, you may have 2-5 marketing channels at a small company (e.g. FB, IG, Adsense, YT, direct mail, out of home, etc), of which some will be better and others will be worse, and you blend them together, changing proportions over time as channels change in effectiveness or cost.

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What do 'CAC' and 'LTV' stand for?

Customer acquisition cost and lifetime value

Customer Acquisition Cost LifeTime Value

According to ChatGPT, in the context of gps post:

"CAC" stands for "Customer Acquisition Cost." It represents the cost a company incurs to acquire a new customer, including all the costs associated with marketing and advertising.

"LTV" stands for "Lifetime Value." It represents the total net profit a company expects to earn from a customer throughout their entire relationship with the company. This takes into account all the revenue a customer will bring to the company minus any costs associated with serving that customer over their lifetime.

> "LTV" stands for "Lifetime Value." It represents the total net profit a company expects to earn from a customer throughout their entire relationship with the company. This takes into account all the revenue a customer will bring to the company minus any costs associated with serving that customer over their lifetime.

This seems subtly wrong from what I remember (though it's been like 6 years).

Gross profit not net profit.

Lifetime is "lifetime", you set a cap in years, it's not really the "entire relationship".

The latter one isn't as big of a deal because it gets stupid hard to track/measure that long anyways, but the former one is a pretty big deal.

Remember not to trust ChatGPT with facts.

Apologies. CAC is "Customer Acquisition Cost" and LTV is "Life Time Value".

e.g. If I buy $100 of ad views and over all of those ads get 10 new customers, then my CAC is $10. If a customer on average spends $100 over their lifetime (typically defined as 3 or 5 years, but varies per business) on orders that cost me $70 to fulfil, then their LTV is $30 (Edit: as marketing is not included in gross profit).

Would it not be $20, or does eve acquisition cost not factor?

Good question, but it doesn't (I've updated the comment).

The LTV is in terms of gross profit not net profit. It's the revenue minus the direct cost of fulfilling that revenue (cost of goods sold), so it would include: products, shipping, packaging, payment fees, staff time for handling, etc. It would not include: marketing, customer support (surprisingly!), R&D or creating the product, fixed costs such as offices, staff, etc.

I'm not quite sure what the best practice is on accounting for salaries of the marketing department. I think you wouldn't typically include full time employees managing marketing channels, but if you outsourced marketing to an agency you probably would account for the all-in cost to acquire customers via the agency, as they are almost their own marketing channel in a way. It really varies though, and I could be wrong on the best practice here.

It's $30 because people look at the ratio. That is, LTV/CAC is an important ratio that takes both into account.

It makes more sense if you think about it as a function that turns CAC into LTV.

Customer acquisition cost. Lifetime value.

I am not sure about whether the metrics above are benchmarks for CAC based on advertisement alone.

CAC includes all costs, marketing and sales (implementation is part of COGS)

Some products (B2C) are marketing heavy. Others (B2B) are sales heavy. But they both get included

One might say that LTV/CAC ratio is the overall average ROI :)

How do you accurately measure these numbers? I suspect you don't.

Take the ACV, compound it with net churn to it to obtain LTV.

Add the cost of your sales and marketing and divide by the number of deals during that time to obtain CAC.

Then you can calculate both LTV/CAC and CAC payback.

Doesn’t that have to assume that all deals came through advertising? In my case I find more and more sales are word of mouth or from organic search, but it’s very hard to measure (at least in B2B).

CAC is an aggregate measure, for all sales and marketing costs.

Per channel attribution is of course far more difficult, depending on the channel.

Author of article here - this is spot on! 3x CAC/LTV ratio and 12 month payback is often what you're aiming for.

there is no such thing as defined LTV/CAC ratio. That depends on almost every business.

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