For many small and medium-sized enterprises (SMEs), setting a marketing budget feels like throwing darts in the dark. Should you spend £500 or £5,000 on Google Ads? Is that trade show ticket worth the investment? Without a clear framework, marketing efforts often remain stuck in guesswork, leading to underinvestment or, worse, inefficient overspending.
The key to unlocking consistent, predictable business growth isn’t a complex secret; it’s mastering one foundational economic ratio. This ratio acts as the mathematical filter for all your sales and marketing decisions, helping you predict how profitable you will be, how far you can scale your advertising, and how many customers you can reliably acquire.
As entrepreneur and investor Alex Hormozi explains, understanding this number is non-negotiable if you want to grow a big business. When this ratio is maximised, businesses can obtain a metaphorical “license to print money” for as long as they can maintain it.
The Two Critical Metrics: LTGP and CAC
The fundamental number that guides your spending is a ratio between two core metrics: the Lifetime Gross Profit you gain from a customer, and the cost incurred to acquire them.
1. Lifetime Gross Profit (LTGP)
When people talk about the “Lifetime Value” (LTV) of a customer, they often just mean the total revenue received. However, the crucial metric you must use is Lifetime Gross Profit (LTGP).
LTGP is the total profit generated from a customer over the entire duration of your relationship, after subtracting the cost of delivering your goods or services (Cost of Goods Sold or COGS).
Why Gross Profit Matters: You cannot reinvest revenue; you can only reinvest profit. For service-based businesses, failing to subtract the direct costs associated with delivery (like delivery payroll or materials) and mistakenly treating it as revenue is a common error that can mask severe financial problems.
2. Customer Acquisition Cost (CAC)
The Customer Acquisition Cost (CAC) is simply how much it costs you in time and money to get one new customer.
To calculate your historical CAC, gather all costs related to sales and marketing over a specific period (e.g. 30 days, a quarter, or a year). These costs include marketing payroll, media/advertising dollars, and sales team commissions. Then, divide the total cost by the number of new customers acquired during that same period.
CAC Calculation Example: If you spent £20,000 total on sales and marketing (ads + payroll) and acquired 20 new customers, your CAC is £1,000 per customer.
The North Star: The LTGP to CAC Ratio
Once you have both figures, you can determine your ratio, which is the fundamental economic unit of the business. This ratio describes the relationship between how much it costs you to make more money.
In the video “Business Owners: You NEED to Know This Number,” Alex Hormozi highlights the importance of mastering this ratio. A frequently cited benchmark for sustainable growth is the 1:3 ratio between CAC and LTGP.
- This means that for every £1 spent to acquire a customer (CAC), you aim to generate £3 (or more) in Lifetime Gross Profit.
- If a customer generates £6,000 in LTGP, you could reasonably afford to spend up to £2,000 to acquire them while maintaining a healthy, profitable relationship.
A massive LTGP to CAC ratio provides a significant competitive advantage, acting as an ethical competitive “moat“. If your ratio is strong enough (e.g. 10:1 or even higher, as some extreme cases demonstrate), you can actually afford to outspend your competition on advertising and take all of their customers, and still be profitable. This ability to afford a higher CAC is crucial for scaling into colder audiences or new channels.
Turning Numbers into Budgets
Knowing your ratio allows you to shift from guessing budgets to reverse-engineering them based on your goals. This process ensures every pound spent is justified and directly contributes to profitability.
One practical way to use this relationship is through a concept known as the Marketing Spend Calculator. This involves working backward from your revenue goals using these metrics:
- Define LTGP:
Determine the average profit (LTGP) you make from a typical customer. - Set Max CAC:
Based on your LTGP, decide the maximum you are willing to spend to acquire that customer (e.g., 33% of LTGP). - Determine Conversion Rate:
Calculate how many leads you need to close one customer. - Calculate Max Cost Per Lead:
Divide your Max CAC (Answer 2) by the number of leads needed (Answer 3). This gives you the maximum justifiable cost you can spend to acquire a single lead that still makes sense for your business. - Set Target Spend:
Multiply the number of new customers you want next month by the necessary number of leads, and then multiply that by your Max Cost Per Lead.
This process gives you a verifiable figure for how much you should budget for customer acquisition based on business logic, not just gut feeling.
In summary, the question “How much should you spend to acquire a customer?” should always be answered with a look at the LTGP to CAC ratio. Businesses that master this simple calculation gain enormous power, allowing them to make confident, ROI-driven choices and scale their growth effectively, whereas those who ignore it will struggle to break past early revenue ceilings. If you put £1 in and get £3 or more in gross profit back, you have a solid machine and you should run that machine as many times as you possibly can.
Think of the LTGP to CAC ratio like the fuel gauge and efficiency rating of a vehicle you use for business expansion. If you know exactly how many miles (gross profit) you get per gallon (acquisition cost), you can confidently outpace competitors and invest wisely in faster routes, knowing precisely how far your budget can take you.