Define Lifetime Value (LTV) and explain its relationship to CAC in budgeting.

• A. LTV is the current monthly revenue per customer; budgeting should aim for LTV < CAC.
• B. LTV is the total revenue from a customer; budgeting should try to maximize CAC.
• C. LTV is the expected net profit from a customer over their lifetime; budgeting should aim for LTV > CAC.
• D. LTV is the number of purchases per customer; budgeting ignores CAC.

Answer: (C)

Lifetime Value tells you the expected net profit you’ll earn from a customer over the entire time they stay with your business—revenue from that customer minus the costs tied to serving them, added up across their relationship with you. In budgeting, this is compared to what you spend to acquire that customer (CAC). The best guiding rule is to keep LTV greater than CAC, so the profit you gain from a customer over their lifetime covers the cost to get them and still leaves a return. If LTV is not higher than CAC, marketing spend isn’t sustainable in the long run. Remember, LTV isn’t just current monthly revenue, and budgeting isn’t about maximizing CAC; it’s about ensuring long-term profitability by investing in customers who, over time, are worth more to the business than the cost to acquire them.