Podcast Summary: The Game with Alex Hormozi
Episode Title: LTV vs CAC: The Ratio That Runs Everything | Ep 928
Release Date: July 23, 2025
Introduction
In Episode 928 of The Game with Alex Hormozi, host Alex Hormozi delves deep into the critical business metrics of Lifetime Value (LTV) and Customer Acquisition Cost (CAC). Drawing from his extensive 14-year entrepreneurial journey managing a portfolio that generated $250 million in revenue last year, Hormozi elucidates why understanding and optimizing the LTV to CAC ratio is paramount for sustainable business growth and long-term success.
Understanding the Fundamental Business Model
Cash Flow as the Lifeline
Hormozi begins by emphasizing the foundational principle that "everything in business changes once you understand this"—the necessity of maintaining positive cash flow. He states:
"All you have to do to stay in business is you have to have cash. And in order to have cash, you need to increase what you make versus what you spend to make it."
— Alex Hormozi [00:00]
He clarifies that managing the ratio of revenue to expenditure and the payback period is crucial for growth and reinvestment. According to Hormozi, while myriad tactics and methods are often touted in business advice, the enduring "model"—the underlying ratio of LTV to CAC—supersedes transient strategies.
Model vs. Method
Hormozi distinguishes between "methods," which are tactics that can expire or become obsolete, and "models," which are sustainable frameworks that endure over time.
"Methods always expire. Models last forever. And so the most enduring model is the one that you want to build from day one."
— Alex Hormozi [00:00]
Real-World Application: The Brick-and-Mortar Example
To illustrate his points, Hormozi shares a real-world example from his early business days:
- Initial Campaign: Ran a free six-week challenge, acquiring leads at $5-$10 each.
- Conversion Rate: Converted 1 out of every 5 leads into a $500 sale, resulting in a CAC of $25.
- Gross Margins: With service costs at $100, each customer yielded a gross profit of $400.
"So if you can build a business where you put $25 in and then $400 of gross profit comes out, that is very good business."
— Alex Hormozi [00:05]
He explains how reinvesting the $400 gross profit consistently can exponentially grow the business, highlighting the power of the "cash conversion cycle."
Scaling Through the Cash Conversion Cycle
Acceleration of Growth
Hormozi compares two business scenarios to demonstrate the impact of the cash conversion cycle's speed:
- Slow Cycle: Invest $25 today, receive $400 in 10 years.
- Fast Cycle: Invest $25 daily, receive $400 the same day.
The latter allows for 365 cycles in a year versus just one in a decade, showcasing the stark difference in potential returns.
"Would you rather have a business where you pay $25 today and then you get $400 back today?"
— Alex Hormozi [00:10]
Marketing Budget Philosophy
Challenging conventional wisdom, Hormozi asserts that businesses shouldn’t impose strict marketing budgets based on arbitrary limits. Instead, marketing spend should be dictated by operational capacities and the ability to fulfill sales.
"The marketing budget is spend as much as you possibly can and then wait till something else in your business breaks."
— Alex Hormozi [00:18]
Key Metrics Explained
Lifetime Value (LTV) vs. Customer Acquisition Cost (CAC)
Hormozi breaks down the critical metrics:
-
CAC: Total cost spent on acquiring customers divided by the number of new customers.
"Total acquisition costs, number of new customers over that period equals CAC."
— Alex Hormozi [00:30] -
LTV: Revenue per customer multiplied by gross profit margin.
"Lifetime gross profit is LTV. What's the amount of money you make after you spend whatever you gotta spend in delivering for the customer?"
— Alex Hormozi [00:35]
Optimal LTV to CAC Ratios
He introduces the concept that the desired LTV to CAC ratio depends on the level of automation within the business:
- Fully Automated (3:1)
- Partially Automated (6:1)
- Minimal Automation (9:1)
- Non-Automated (12:1)
"If all three are not automated... you need to be over 12 to 1."
— Alex Hormozi [00:55]
Scaling Challenges and Solutions
Increasing Acquisition Costs Over Time
Hormozi warns that as businesses scale, acquiring customers becomes progressively more expensive due to factors like market saturation and higher competition, necessitating higher LTV to CAC ratios for continued profitability.
"The cost of getting new customers is actually going to go up as you go to colder and colder markets."
— Alex Hormozi [01:10]
Operational Inefficiencies
As businesses grow, operational costs and inefficiencies emerge, such as the need for additional sales staff or marketing efforts, which must be accounted for within the LTV to CAC framework to prevent financial strain.
"You have to have this model to support that... because the number one rule of business is you have to can stay in business as long as you got money."
— Alex Hormozi [01:30]
Strategies to Improve the LTV to CAC Ratio
Hormozi outlines several actionable strategies to enhance the LTV to CAC ratio:
-
Increase Pricing
"You can raise the price."
— Alex Hormozi [01:45] -
Decrease Costs
- Negotiate better rates
- Achieve economies of scale
"You can decrease costs... negotiate better rates on your shipping."
— Alex Hormozi [01:50] -
Implement Upsells and Cross-Sells
"You can have upsells... cross sells."
— Alex Hormozi [01:55] -
Optimize Payment Structures
- Offer financing
- Adjust payment terms to front-load cash
"You can add financing... change the terms of how you collect payment."
— Alex Hormozi [02:00]
Illustrative Examples
Hormozi provides concrete examples to demonstrate these strategies:
- Books: Upselling from a digital to a hardcopy version.
- Tables: Upselling to higher quality materials or adding complementary products like chairs and table covers.
"If I wanted to run through this, I could raise the price of my book... or I could have upsells... cross sell a second book that was different than the original book."
— Alex Hormozi [02:10]
Optimizing for Returns, Not Just Cost
Hormozi emphasizes that businesses should prioritize maximizing the return on each dollar spent rather than merely minimizing customer acquisition costs. He presents a comparative scenario:
- Scenario 1: LTV = $5,000, CAC = $500 (10:1 ratio)
- Scenario 2: LTV = $1,000, CAC = $200 (5:1 ratio)
Despite the higher CAC in Scenario 1, the higher LTV to CAC ratio makes it the more profitable and sustainable option.
"We want to optimize for our returns, not for one specific number of I want the cheapest leads."
— Alex Hormozi [02:25]
Conclusion: The Model as a Competitive Advantage
Hormozi concludes by reinforcing that a robust LTV to CAC model serves as a competitive advantage. While methods and tactics are susceptible to being replicated or becoming outdated, the underlying model—how efficiently a business can acquire and profit from customers—ensures long-term dominance.
"The model is the competitive advantage. A method is a one trick, right? And that will expire. So you want to always double down on the model."
— Alex Hormozi [02:35]
By internalizing and optimizing the LTV to CAC ratio, businesses can achieve scalable growth, navigate increasing acquisition costs, and maintain financial health even as they expand.
Notable Quotes
-
On Business Fundamentals:
"All you have to do to stay in business is you have to have cash."
— Alex Hormozi [00:00] -
On Model vs. Method:
"Methods always expire. Models last forever."
— Alex Hormozi [00:00] -
On Marketing Budgets:
"The marketing budget is spend as much as you possibly can and then wait till something else in your business breaks."
— Alex Hormozi [00:18] -
On Scaling and Operational Constraints:
"The number one rule of business is you have to can stay in business as long as you got money."
— Alex Hormozi [01:30] -
On Competitive Advantage:
"The model is the competitive advantage. A method is a one trick, right? And that will expire."
— Alex Hormozi [02:35]
Final Thoughts
Episode 928 serves as a masterclass in understanding and leveraging the LTV to CAC ratio to drive business success. Alex Hormozi not only breaks down complex financial metrics into actionable insights but also provides real-world examples and strategies to implement these concepts effectively. For entrepreneurs and business leaders aiming to scale sustainably, this episode underscores the paramount importance of optimizing the LTV to CAC ratio and building a resilient business model.