I remember one spring when a client of mine—an independent apparel brand—asked whether they should double down on new-customer discounting to hit a quarterly revenue target. Their instinct was natural: acquisition feels immediate, measurable and sexy. What we needed instead was a disciplined look at the LTV:CAC ratio to decide if the move would actually build sustainable value.
In this post I’ll walk you through the pragmatic steps I use to decide whether to increase acquisition incentives this quarter, how to calculate and interpret LTV:CAC in an SME context, the pitfalls to avoid, and some quick actions you can take depending on the result. No theory-heavy fluff — just the kind of analysis you can run in a spreadsheet and present to your founder or board.
What the LTV:CAC ratio actually tells you
LTV:CAC compares the lifetime value (LTV) of a customer to the cost of acquiring that customer (CAC). Put simply:
LTV:CAC = Customer Lifetime Value / Customer Acquisition Cost
If LTV is £300 and CAC is £100, your ratio is 3:1 — a common benchmark many marketers use as a rule-of-thumb for a healthy program. But that number alone shouldn’t be the only input to decide whether to increase acquisition incentives.
Here’s what the ratio helps you understand:
How I calculate LTV and CAC for small-to-mid businesses
SMEs often lack perfectly instrumented data. I favour pragmatic, defensible calculations that lean on what’s available: order history, average order value (AOV), purchase frequency, repeat rate, gross margin and media/ad spend data. Here’s a simplified formula I use:
Simple LTV = (AOV x Repeat Purchases per Year x Average Customer Lifespan in Years) x Gross Margin
And CAC is usually:
CAC = Total Acquisition Spend (ads, promotions, affiliate fees, creative & agency costs) / Number of New Customers Acquired
A short example you can drop into a spreadsheet:
| Metric | Value |
|---|---|
| AOV | £40 |
| Repeat purchases per year | 1.5 |
| Average lifespan (years) | 2 |
| Gross margin | 55% |
| Simple LTV | £66 (40 x 1.5 x 2 x 0.55) |
| Total acquisition spend | £6,600 |
| New customers | 200 |
| CAC | £33 |
| LTV:CAC | 2:1 |
This tells you the business gets £2 of LTV for every £1 spent acquiring a customer.
Key questions to ask before increasing incentives
When you’re tempted to increase acquisition incentives (discounts, free shipping, big sign-up offers), I ask myself and the team a set of quick questions. If you can answer “yes” to most, it may be worth testing:
If you can’t answer these crisply, increasing incentives is closer to gambling than strategy.
Interpreting different LTV:CAC outcomes
Here are three typical scenarios I see in SMEs and how I advise clients based on each:
1) LTV:CAC > 3:1 — You have headroom
If your ratio is above 3:1, you generally have room to spend more on acquisition without destroying unit economics. That doesn’t mean unlimited discounts; it means you can experiment with higher incentives strategically.
2) LTV:CAC ≈ 2:1 — Proceed with caution
A 2:1 ratio is common for steady-state but fragile. Small increases in CAC or poor retention can make this unprofitable.
3) LTV:CAC < 1.5:1 — Stop and fix unit economics
This is a red flag. You’re likely losing money on each new customer over their lifetime.
Common pitfalls and how I avoid them
I see a few recurring mistakes when teams use LTV:CAC to justify incentives:
To avoid these, I build simple cohort dashboards and use conservative assumptions when projecting LTV for incentive-driven campaigns. It's better to underpromise and overdeliver than the opposite.
Quick checklist to decide this quarter
When my clients run through this checklist, they rarely decide to “just turn up the discounts.” Instead, they either fund targeted experiments with measurement plans or invest the budget in retention improvements which, time after time, produce higher ROI than blanket incentives.
