What is Customer Lifetime Value and Customer Acquisition Cost?

Marketing can seem like a black box for many businesses that doesn’t get the results they want. So, for example, do you prefer to spend $500 on search engines optimization or paid advertising? Or would you rather just waste the money?

A company making less than $5,000,000 per year should dedicate between 7% to 8% to marketing, according to the US Small Business Administration.

The budget should be divided between brand development and marketing costs. How can you ensure that your money is being well spent?

If you spend money marketing and have a plan, but are not getting customers, you might need to look at your customer acquisition costs (CAC).

How do you calculate CAC and what steps you can take to improve it? This post will explain how to track CAC and what to do to increase your marketing spend. It will also help you to plan your long-term business goals.

CAC Meaning

CAC is the customer acquisition cost. It is the cost a company must spend to acquire a customer. Many companies now use CAC marketing to gain new customers.

CAC assists companies to determine if their investments in growing their clientele are worth it. This could be as simple as paying for potential customers, clicking banners, or investing in graphic content or articles.

Internet marketing can target specific customers today. Before internet marketing, companies needed to reach a broad audience with their advertising.

With the hopes of bringing in new customers, they had to target their marketing content at broad segments of potential customers. This approach is not specific enough to bring in the expected returns for marketing investments. Combining CAC and modern targeted campaigns, these campaigns target specific groups of people.

It will also show you how much it costs to get a prospect onboard and make them a paying customer.

How do you calculate CAC?

When calculating the cost to acquire customers, there are several things you should consider.

These include:

• Advertising costs
• Marketing costs
• Costs for sales team
• Creativity costs
• Costs technical
• Publishing costs
• Production costs
• Costs of inventory upkeep

How do you calculate CAC?

CAC can be calculated by subtracting the cost of acquiring customers from the number acquired during that time.

A company spending $1,000 in marketing and gaining 100 customers in the same year can have their CAC come out to $1.

The customer acquisition cost formula is $1000/1000 customers = $1 per client.

If the company has 500 customers, the CAC would be $2.

It is easy to calculate the CAC.

To add up the total expenses, however, there are many factors to consider including the cost of marketing strategies and salaries of staff.

Companies may make investments in marketing in new regions or early stage , but they don’t expect to see any results until later.

This causes problems when you calculate the CAC.

To account for these circumstances, it is recommended to perform multiple variations.

Example of CAC

Let’s pretend that a home service company provides plumbing and HVAC services.

Marketing efforts for the company include:

• Marketing and sales staff paid
• Social media campaigns
• Campaign with Pay-per-Click
• Magazine ads

The company determines to keep track of how much it costs to attract new customers for one calendar year, from January 1st through December 31st. They will look at what they spent over the year, and how many customers they have at the end.

Here is a breakdown of their customer acquisition costs formula.

• Paid sales and marketing personnel – $150,000 in total
• Social media campaigns – $12,000 total spent
• Pay-per-click campaign – $10,000 total spent
• Magazine ads – $8,400 total spent

Total Marketing Expenses $180,400

Acquisition of a New Customer: 2,512

CAC $180,000.400 / 2,512 = $71.82

According to the calculations, each new customer that was acquired by the company in that year cost on average $71.82. This CAC is quite high for a home service company and should be reviewed. To ensure that you are making money, your CAC should be lower than your average sale price for your product or service.

This is only the beginning of the CAC story. It is also important to calculate how much each customer spends, which can be done using customer lifetime value (CLV).
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Customer Lifetime Value and Customer Acquisition Cost

CLV (Customer Lifetime Value) or LTV (Lifetime Value) are two ways to estimate the value of a customer over their “lifetime”. This can include reasons customers remain loyal to your products. CLV is calculated by adding the annual revenue from customers to the cost of acquisition.

A CLV calculator can be found using any search engine. You can use the CLV to get a better idea of how much customer acquisition costs affect your company. The amount of time that a customer spends and the length of their stay will differ from one company to another. You will need to take into account other factors that could impact your company.

These are the most critical elements of CLV that most organizations need to know

• Average customer life expectancy – How long a customer remains a customer.
• Ratio of customer retention is the percentage of customers that buy again.
• Margin per customer – This includes CAC and any other expenses. These include production and marketing costs, as well as the cost to operate the company.

The profit margin for each customer can be calculated by subtracting the CAC from your net income and then dividing it by your revenue per customer over their lifetime. To calculate the percentage, multiply that number 100 times.
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• The average amount a customer spends in a lifetime. Add the sum of all customers and divide by the number.
• The average gross margin per client can be calculated over a period. This could be a year, or based on the customer’s life expectancy.

Calculate the life expectancy of each customer by taking their profit margin over their lifetime. Divide it by 100. Add that to the amount they spend over their lifetime.

CLV

Let’s take a look at a fake company offering marketing services to small businesses.

Here are the numbers for this company:

• CAC – $180 per customer.
• Average customer stays with us for 10 years.
• The customer’s profit margin is 19%.
• Average amount each customer spent over their entire lifetime with the company: $57,052.
• The average gross margin per customer for their entire lifetime with the company. Calculated using 0.19 x $57.052 = $10.840

How to Increase CAC

There are many ways to increase your customer acquisition costs.

Learn CAC for Marketing Channel

Most marketers would like to know the CAC of each marketing channel. Knowing which channel has the lowest average CAC will help you decide where to spend your marketing budget. You can get more customers if you allocate more marketing budget to channels with lower CAC. You can use your spreadsheet to gather all of your marketing receipts and then add them up by channel.

Improve on-site conversion metrics

Create a Google Analytics goal and do A/B split testing using new checkout systems. This will help you reduce abandonment rates, increase your landing page, speed, mobile optimization, and other factors that can improve the performance of your website.
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Add value to your offer

Your product or service’s value perception is subjective. If you implement features that are similar to those used by other companies, you might not achieve the desired effect. Try a different approach.

Use surveys and emails to help customers determine what is most appropriate. From any reviews you receive, you can also analyze statistics such as customer retention rates and subjective feedback.

Use a CRM System

The CRM system allows you to keep track of your customers and their progress through your sales funnel. It also tracks how much they spend, what loyalty programs they have, and other details. It can be used to manage email campaigns, such as seasonal and promotional email advertising, drip campaigns and email campaigns.
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What can CAC do for you

It is crucial for companies to measure and track CAC. CAC can be used by companies to plan their marketing campaigns, allocate funds and resources. It can help companies guide their hiring decisions and salary negotiations. Combining CLV and CAC creates a powerful tool to help you evaluate your marketing return-on-investment (ROI).