However, this often overlooks non-marketing customer sources like word of mouth, viral organic content, or baseline growth.
This inflates the customer count, artificially lowering CAC and boosting LTV:CAC, creating a misleading impression of growth.
In the long run, this can lead to structural issues.
While some argue that word of mouth stems from branding or top-of-funnel campaigns, this is only sometimes true.
Many customer sources, such as referral programs, sales initiatives, or product-driven growth, are independent of traditional marketing or PPC efforts.
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5. Assuming all customers are equal
Assuming all customers are equal can lead to inflated LTV:CAC ratios and dangerous strategies.
You might attempt to boost LTV and make LTV:CAC look better quickly, but this approach can be misleading.
A common mistake is calculating LTV as total revenue divided by total customers over a period, creating an average that hides differences between customer segments.
Not all customers contribute equally in terms of revenue and retention.
For instance, if the average LTV is $480, it likely doesn’t reflect the actual distribution of customer value:
60% of customers spend around $280.
30% of customers spend around $600.
10% of customers spend around $1,300.
If you aim for a 3:1 LTV:CAC ratio based on the $480 average LTV, you would set a target CAC of $160.
However, for 60% of your customers, who only generate $280 in LTV, the sustainable CAC should be $93 ($280/3).
This highlights a significant gap, as the average target would be too high for most customers.
Additionally, the top 10% of customers with a $1,300 LTV likely aren’t acquired through marketing, which complicates the calculation further.
Bottom line: Targeting a $160 CAC could be harmful. Focus on increasing LTV through targeted PPC efforts.
6. Disregarding changes in LTV fundamentals
The purpose of LTV:CAC is to validate marketing investments, assuming that both CAC and LTV are accurately predictable.
However, these metrics can fluctuate significantly.
Consider a more advanced formula for LTV:
LTV = Monthly recurring revenue x Growth profit margin / Monthly cancellation rate
Each of these components is dynamic and depends on the company’s ability to maintain or improve its fundamentals:
MRR: Can you cross-sell or upsell effectively?
GPM: Can you enhance overall efficiency?
Cancellation rate: Are new competitors entering the market? Is the market shrinking?
For example, HubSpot reportedly tripled its LTV in just 18 months. Now, imagine a smaller company experiencing the opposite trend.
Bottom line: LTV is a forecast, not a certainty. Don’t place too much confidence in LTV or your LTV:CAC ratio.
7. Treating LTV as a strategy
While this might seem slightly off-topic for PPC practitioners, it’s crucial to grasp when collaborating with stakeholders.
Holding the LTV flag high without fully engaging with others can lead to issues.
Imagine you secure additional budget for performance marketing – great news!
But as spending increases, CAC rises, making the LTV:CAC ratio worse.
In response, you might raise prices to boost LTV.
Problem solved?
Not quite.
Higher prices may lead to increased monthly cancellations. Even worse, the new customers acquired with that extra budget might be of lower quality, spending less and churning faster.
The customer support team steps in, confident they can resolve these issues by expanding their efforts, which increases costs and strains cash flow.
This scenario highlights how LTV is deeply interconnected with various aspects of the business.
Mistaking this metric for a stand-alone strategy can lead to missteps. It’s essential to use LTV as a tool, not a strategy in itself, to ensure sustainable growth.
How to ‘fix’ LTV:CAC, plus alternative KPIs
LTV:CAC can be a useful metric, but its complexity and potential for misinterpretation mean it requires careful handling.
To make the most of this KPI and ensure it accurately reflects your business’s health, consider the following tips.
Low retention? Don’t use LTV:CAC
In ecommerce, if your repeat purchase rate is around 30%, LTV may not be a relevant metric from a marketing perspective.
Instead, focus on CAC alone and aim to be profitable from the first order.
This approach, though tougher, is more sustainable and reflective of genuine growth – think ROAS.
Improve retention through upselling, cross-selling, customer support, or product enhancements.
Dig deeper: How to analyze PPC performance metrics
Collaborate with finance
If using LTV makes sense, build a strong relationship with your finance team.
Understanding their perspective will help you grasp why certain LTV targets are set.
To achieve this:
Learn key financial terms.
Schedule regular alignment meetings.
Use agreed-upon data sources to avoid conflicts.
Never report on LTV:CAC alone
Because LTV:CAC encompasses multiple variables, it’s not a standalone metric.
Include core components like cancellation rate and MRR in your reports.
This clarity will help identify which components have shifted and guide your next steps.
Remember, LTV and CAC are dynamic, not fixed.
Segment by customer groups
Segmenting your customer base allows you to pinpoint areas for improvement and identify which customers to exclude. Consider:
Calculating LTV over different timeframes (30 days, 90 days, 12 months).
Segmenting customers by cohorts, behavior, and profitability.
Differentiating between PPC, organic, and non-marketing customers.
Use LTV:CAC wisely
LTV:CAC is valuable for comparing PPC channels and marketing programs, but it’s a complex measurement tool.
To avoid potential pitfalls, make sure to:
Conduct a retention analysis before relying on LTV:CAC.
Partner with your finance team to align on metrics.
Always segment customers, sources, and micro-KPIs.
Dig deeper: The fallacy of CTR as a KPI: Redefining PPC ad success