Ep 161: The Most Important Number Every Membership Owner Needs to Know (LTV/CAC Explained)

Mar 18

The Most Important Number Every Membership Owner Needs to Know (LTV/CAC Explained)

Have you ever poured money into ads or marketing and wondered if it’s worth it? Or maybe your membership is growing, but your bank account tells a different story. This is more common than you might think.

Many membership owners focus on growth but struggle to understand if their business is truly profitable. The solution? Knowing your LTV to CAC ratio—a powerful metric that shows whether your marketing efforts are sustainable and your membership is on a profitable path.

What is the LTV to CAC Ratio?

CAC (Customer Acquisition Cost): The amount you spend to get a new member.
LTV (Lifetime Value): The total revenue you earn from a member over their lifetime in your membership.

If your CAC is higher than your LTV, you’re losing money. But if your LTV is significantly higher, you’re building a profitable, sustainable membership.

Why It Matters:

Clarity: Understand if you’re spending efficiently on member acquisition.
Focus: Determine whether to improve retention (LTV) or reduce acquisition costs (CAC).
Sustainability: Ensure your membership isn’t just growing but profitable for the long term.

How to Calculate Your LTV to CAC Ratio

Step 1: Calculate Your CAC
Divide your total marketing costs by the number of members acquired

If you spend $1,000 on marketing and gain 10 members, your CAC is $100.

Step 2: Calculate Your LTV
Multiply your average monthly revenue per member by the average number of months they stay.

If your membership costs $50/month and the average member stays for 10 months, your LTV is $500.

Resource: Need help calculating the average length of stay, retention/churn, or LTV? Here’s a free calculator.

Step 3: Compare LTV to CAC
Divide LTV by CAC to find your ratio.

$500 LTV ÷ $100 CAC = 5:1 ratio.

A healthy LTV to CAC ratio is at least 3:1, meaning you earn $3 for every $1 spent acquiring a member. Consider how long it takes to get the average LTV and other operational expenses to determine the ideal ratio.

The Impact of Retention on LTV

Retention significantly affects your LTV, making it a critical factor in improving profitability.

Retention at 90% (10% churn) = 10-month average stay → $500 LTV.
Retention at 95% (5% churn) = 20-month average stay → $1,000 LTV.

By improving retention with better systems, you can double your LTV without acquiring a single new member.

Steps to Improve Your LTV to CAC Ratio

1. Track Your Numbers

Use tools like a spreadsheet or membership software to calculate CAC and LTV.
Simplify the process with my free Lifetime Value Calculator at MemberLTV.com.

2. Know Your Break-Even Point

If your CAC is close to or higher than your LTV, prioritize retention and reduce acquisition costs until your numbers stabilize.

3. Refine Your Acquisition Strategy

High CAC? Focus on organic marketing or refine your ads to attract better-fit members.
High LTV to CAC? Consider investing more in advertising to scale.

4. Optimize Retention

Keep members longer to increase LTV.
Download my free Retention Strategy Guide at RetainGuide.com for actionable tips.

Why Tracking Your LTV to CAC Ratio is Essential

Understanding this ratio gives you control over your membership’s financial health. It’s your roadmap for scaling sustainably while keeping your membership profitable.

If you’re serious about building a thriving membership business, tracking your LTV to CAC ratio isn’t optional—it’s essential.

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Shana Lynn