Every business knows that marketing is important to build a brand, attract new customers, and retain current customers. But, a marketing expert at WNY Holdings, Christopher Lee, often sees that business owners don’t know how to track, manage and analyze their marketing plans effectively.
Luckily, there are standard metrics that any business can use to track marketing performance and the company’s long-term success. These metrics are called Customer Acquisition Cost (CAC) and Customer Lifetime Value (CTLV).
Taken together, both of these metrics help a business track the effectiveness of its customer acquisition and lead generation strategies. They also help companies predict how much revenue they are going to turn over in the future and what their rate of growth is likely to be.
This is just the tip of the iceberg, though. The two metrics also allow businesses to develop strategies to effectively increase revenue and understand which part of their lead generation strategy is the most effective.
However, before you can do that, you need to understand how to calculate these two essential metrics. WNY’s Marketing Manager, Christopher Lee, explains how.
Customer Acquisition Cost
Customer Acquisition Cost (CAC) is a measurement that shows how much it costs a business to convert one prospect into a paid customer. This calculation refers to the overall average cost to acquire a customer. It’s not narrowly focused on a particular digital marketing campaign, for example, like Cost Per Acquisition (CPA) is.
CAC is a relatively simple metric to calculate. You divide the total marketing expenses spent by the number of new customers that you were able to acquire.
If your total marketing spend was $1,000 and you acquired ten new customers with that money, your CAC in this instance would be $100 ($1,000/10).
The variable here is the amount of time that you wish to analyze. CAC can be calculated across any time period you choose, whether it be one month, every quarter, twice a year, once a year, or more.
Obviously, the goal of any business is to keep their CAC as low as possible. The less expensive it is to acquire a new customer, the more profitable the company can be with each new customer.
Customer Lifetime Value
It’s essential for businesses to understand what their CAC is. However, it doesn’t tell the whole story. Not until you bring in Customer Lifetime Value (CTLV) do you begin to see the entire picture.
CTLV shows you the total that each customer will spend with your company from the time they make their first purchase until the time they make their last purchase.
This metric is valuable in quite a number of ways. First, it affects the business’ overall revenue. By calculating CTLV, you can segment and target all the customers that would be ideal for your business.
Then, you can tailor customer retention, loyalty, and service programs to meet their needs. By focusing on the ideal customers, you’ll optimize your marketing spend and your spending across multiple departments.
Finally, by tailoring programs to increase your CTLV, you’ll directly decrease the cost of acquiring new customers. Since you’ll be improving your retention rate — and therefore scrambling less to find new customers — you won’t be spending as much to acquire the new customers.
To calculate CTLV, you first have to take the average purchase price of your products and/or services. Once you have that data, you multiple it by the average purchases that a customer will make. The result will give you your business’ customer value.
Finally, take the customer lifespan and multiple it by your customer value, and you’ll have your overall CTLV.
As Christopher Lee points out, there are many variables that can go into CTLV. Typically speaking, businesses will figure their average purchase value by taking their total revenue and dividing it by the total number of purchases/orders they get.
You can also calculate your average purchase frequency rate from average purchase value, which is done by dividing the number of purchases by the number of customers you have.
Then, you can calculate your customer value by taking the average purchase value and multiplying it by the average purchase frequency rate.
That leads to average customer lifespan, which is calculated by dividing the total lifespan of all your customers by the total number of customers you have.
Once you do all this, you’ll land back on the CTLV formula from above — customer value multiplied by average customer lifespan.
Knowing how to calculate both CAC and CTLV, and understanding how you can use these metrics, are crucial for business owners in any industry.
About Christopher Lee
Christopher Lee is the Marketing Manager at WNY Holdings LLC, a customer-focused digital marketing company that was started in 2018 to provide tailored marketing strategies for small businesses. Christopher Lee assists clients with all their digital marketing needs, from content marketing, web, and graphic design, media creation, SEO, all the way to Facebook advertising.