• Dale

Two critical KPIs: Customer Acquisition Cost & Life Time Value

As we know, a key to business success lies in getting customers. No customers – no business, no matter how great the product. When times are easy, getting customers may well be easy too. But in tougher times, you have to learn the skill of getting customers and get good at marketing. Mastering marketing will make the difference between surviving or not surviving, or the difference between struggling and thriving. If you want to thrive in 2022, up-skill your marketing.

To grow, there are really only three tactics:

1) get new customers

2) retain existing customers

3) sell both groups more at good prices

To drive this, there are two key figures or KPIs in any business. They are know by different names, but commonly

  • Customer Acquisition Cost – CAC

  • Customer Life Time Value – CLTV (or simply LTV, or CLV) - one of the most important metrics to measure at any growing company.

In many ways, these two figures can drive all business decisions. Is what you are doing now decreasing CAC or increasing LTV? No? Then what are you doing? What are you aiming at?

Calculating CAC

This is the amount of money it takes to acquire a new customer

Customer Acquisition Cost (CAC) = total amount of money spent on customer acquisition / the number of customers acquired. It is often calculated on a per-lead basis.

Bear in mind also that some marketing looks like its free, you don’t have to spend anything on it. But if you are spending time on it, and you are serious about building your business – it is not free. How much is your time worth?

Calculating LTV

This is the revenue you can reasonably expect an average customer to generate for you throughout their relationship with you.

Average Purchase Value = total revenue in a period (usually one year) / the number of purchases throughout that same period.

Average Purchase Frequency Rate = number of purchases / number of unique customers who made purchases during that period.

Customer Value = Average Purchase Value * Average Purchase Frequency Rate

Average Customer Lifespan = average number of years a customer continues purchasing

Customer Lifetime Value (CLTV) = Customer Value * Average Customer Lifespan.

Of course this is a simplistic formula. As with most things in life, it can get a whole lot more complicated. Check out a more detailed calculation here

Suffice it to say, increasing this number is crucial.

Significance of these KPIs

You need to know how much it costs you to get a customer, and how much that customer is likely to bring in. For example a CAC of £50 and an LTV of £60 is not a good return on investment.

Much of business and marketing strategy is around these two metrics. You need to be reducing CAC and increasing LTV. How? Well, that is where mastering marketing comes in.

Consider some examples of lowering CAC

  • target your customers more accurately (avoid targetting people who won’t buy from you anyway)

  • target more to existing customers

  • make better use of referrals (referrals strategies)

  • make better use of video (video strategies)

  • better understand media channels and technologies, especially new developments

  • better understand social and behavioral changes

Consider some examples of how to increase LTV

  • increase your prices (premium pricing strategies)

  • increase the number of offers (sales funnel strategies)

  • increase the number of products and services you offer (product development strategies, joint ventures)

  • improve customer services, and marketing activity to nurture, support and educate customers (customer retention strategies)

These are some thoughts around this topic. Some say you should obsess about these. As I sit here writing this, my thoughts go around all the things I have not mentioned. But then, the aim of the blog is to highlight the significance of these two KPIs - CAC and LTV. It is not meant to be a marketing master-plan. Just a wee look at two significant items. Are you using these, and if so, are you using them as well as you might?

What are your top KPIs?

If you'd like to chat about anything in here, or if I can help...

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