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Understanding LTG to CAC Ratio on Facebook Ads
Calculating LTG for Your Business
Breaking Down LTG Components
Understanding Gross Profit Margin Calculation
Improving Your Business's LTG Value
Calculating Gross Profit Margin for Service Businesses
Importance of LTG Margin over Revenue
Calculating CAC for Your Business
Understanding LTG to CAC Ratio Calculation
Improving your LTG to CAC Ratio
Considerations for LTG to CAC Ratio
FAQ

Understanding LTG to CAC Ratio on Facebook Ads

You have to know what I'm about to show you if you want to make money from Facebook ads, no matter what business you are in. Most Facebook advertisers don't know this, and I don't want that to be you. I'm talking about a very specific metric called LTG to CAC ratio, and that might sound quite complicated. A lot of business owners find this quite complicated, but I'm going to show you exactly how to calculate it for your business. I'm going to walk you through it step by step. You absolutely need to know what it is.

Calculating LTG for Your Business

Now, to make this as easy and straightforward as possible, easy to understand as possible, um, I've got a spreadsheet here and we're going to go through the entire process. Don't be intimidated by this. The mass we're going to do is very, very straightforward. We’re calculating this metric, right? LTGP to CAC ratio. There are two component parts. We'll break those down. We'll start with the LTGP, um, first, um, which refers to Lifetime gross profit. So what we're looking to calculate here is how much gross profit do we generate from each customer on average over their lifetime interactions with our business um. And there are a number of different metrics that we need to input in order to reach this number.

Breaking Down LTG Components

The first one is average order value and this can work if you're a product business, service business. Whatever, by the way, average order value. So how much on average do people, um, usually pay to your business for your products and services in one go? Okay, so this could be average order value of, say, if someone's purchased through a Shopify store, what's their average checkout value Shopify will give you that number or if it's a service, how much does someone pay, on average to your business? Is it $2,000 a month? Is it $500? Whatever.

Understanding Gross Profit Margin Calculation

The next thing we need to work out is how many times on average does someone purchase from your business. Now, the reason why I've got average number of purchases SL months in here is because if you're on a subscription type basis, you're a software business, you're a gym, you’re a marketing agency that works on a retainer, the number of purchases is going to be how many months they stick around for, okay? Average number of purchases, let's say in this example, this V is doing quite a good job of reactivating existing customers and the average person buys six times during their lifetime.

Improving Your Business's LTG Value

Okay, then we simply multiply those two numbers together to get our lifetime revenue per customer, right? So, we're just doing 125 times 6, which gives us a lifetime revenue per customer of $750 on average. The average customer, the first purchase of a business will go on to spend $750 with us, right? The next thing we need to calculate is our gross profit margin. So, out of that 750, how much of that is cost of goods and direct cost? Now, with physical product businesses, this is often really easy to calculate because it's just going to be your cost of goods sold, right? It's going to be the cost from the manufacturer for the product.

Calculating Gross Profit Margin for Service Businesses

Okay, now that gives us a lifetime gross profit. We just multiplied these numbers together again. So, we multiplied that 750 by 50% and that gives us 375. So, our lifetime gross profit per customer on average for this example business is $375, a really, really important metric.

Importance of LTG Margin over Revenue

Now what a lot of businesses get this wrong is they look at lifetime revenue per customer, but that doesn't factor in margin. We could have a couple of different businesses, let’s say business A, business B. They both generate $750 per customer when it comes to lifetime revenue. But if business A has a 10% gross profit margin, that means that only $75 of that is gross profit, whereas if business B has a 90% gross profit margin, then that means that $675 of that is gross profit.

Calculating CAC for Your Business

So, we're looking at $50 to acquire a new customer in this scenario. And you can do different time frames on this. You could look at over a year if you've got more data. Absolutely add that in. Again, this is a metric that we're going to want to improve, and that's often what we're trying to do as Facebook and Instagram advertisers. We're trying to reduce our cost to acquire a customer.

Understanding LTG to CAC Ratio Calculation

Then we just very simply to calculate this as a ratio, it's just LTGP divided by our cost to acquire a customer, which is going to come out at 7.5. Or displayed as a ratio, it would be like this 7.5 to one. That's our LGP to CAC ratio.

Improving your LTG to CAC Ratio

Now, what that means is that for every dollar that we're spending on ads, we are generating $7.50 in gross profit, which is fantastic. That's a really, really good number. What we're aiming for when it comes to targets here is anything really above a three. And you might be thinking, why not a two? Why wouldn't two work? Surely $1 in, $2 back is great.

Considerations for LTG to CAC Ratio

In this scenario, the average customer buys six times, you're only seeing that first one; you're not including those five other purchases. So, really important to note there. Also important for you to think about this from a cash flow standpoint and whilst this example is cash flow positive on that first transaction, you can have a very profitable business that isn't cash flow positive on the first transaction.

FAQ

Q: What is LTG to CAC ratio on Facebook Ads?
A: LTG to CAC ratio is a specific metric that calculates the lifetime gross profit to cost of customer acquisition ratio, used by Facebook advertisers to measure the effectiveness of their ad campaigns.
Q: How can I calculate LTG for my business?
A: To calculate LTG for your business, you need to determine the lifetime gross profit generated from each customer over their interactions with your business. This involves considering metrics like average order value, average number of purchases, and gross profit margin.
Q: What are the components of LTG calculation?
A: The components of LTG calculation include average order value, average number of purchases, and gross profit margin. These metrics help in determining the lifetime revenue per customer and lifetime gross profit per customer.
Q: How can I improve my business's LTG value?
A: To improve your business's LTG value, you can focus on increasing the average order value, encouraging repeat purchases, and optimizing your gross profit margin. These factors can positively impact the lifetime revenue and gross profit per customer.
Q: Why is LTG margin important over revenue?
A: LTG margin is important over revenue because it considers the gross profit margin, which indicates how much of the revenue is actual profit. Businesses with higher LTG margins can generate more profit from the same lifetime revenue compared to businesses with lower margins.
Q: How can I calculate CAC for my business?
A: To calculate the cost of customer acquisition (CAC) for your business, you need to determine how much it costs to acquire a new customer. This involves considering expenses related to marketing and sales efforts aimed at acquiring new customers.
Q: How is LTG to CAC ratio calculated?
A: The LTG to CAC ratio is calculated by dividing the lifetime gross profit (LTGP) by the cost to acquire a customer (CAC). The resulting ratio provides insights into the profitability of customer acquisition efforts, with higher ratios indicating better returns on ad spend.
Q: How can I improve my LTG to CAC ratio?
A: You can improve your LTG to CAC ratio by increasing your lifetime gross profit per customer through strategies like increasing order value, encouraging repeat purchases, and optimizing profit margins. Additionally, reducing the cost of customer acquisition can also improve the ratio.
Q: What considerations are important for LTG to CAC ratio?
A: When analyzing the LTG to CAC ratio, it's important to consider factors like the average number of purchases per customer, cash flow implications, and the overall profitability of customer interactions. Understanding these aspects can help in optimizing the ratio for better business performance.