Some entrepreneurs become disillusioned with the benefits of marketing and think that it brings only problems. This opinion is formed due to the fact that businessmen do not want to delve into the work of marketers. What for? I hired a specialist, entrusted him with all marketing tasks – and went to do other more important things.
But you need to control the work of your employees, even if they are professionals. And in order to keep everything under control, you need to understand what exactly the employees are doing.
In this article, we will tell you about the important metrics that marketers use – CAC (customer acquisition cost) and LTV (customer lifetime value). Get comfortable, we’re about to start.
Customers cheap, buy!
Customers are not cakes, and no one sells them on the market. If you want to get a client, then you need to spend a lot of effort and money. CAC (Customer Acquisition Cost) helps you understand how much a new customer has cost you.
In other words, customer acquisition cost is the total amount spent to get one customer interested. Thanks to this metric, you can conclude whether your business model is viable and what adjustments it needs.
Your own marketer
How to calculate SAS? Of course, it’s easier than ever to contact your marketer and ask him to provide the numbers. But that’s not why you’re reading our blog, right? You can and should calculate the cost of acquiring a clientyourself. To do this, you need to take accurate data from the CRM system (do you have one?). To calculate the CAC, divide the sum of all expenses by the number of customers that you managed to attract.
But remember that such a formula is not ideal, if you need more informative data, then you will have to take into account other factors. In this case, you still have to contact a marketer. Oh, and don’t forget one more thing: the average cost of customer acquisition directly depends on the price of the service you advertise: the more expensive it is, the higher the advertising costs will be.
Happy Lifetime Clients
If customers like everything, then they will constantly buy from you, but hardly throughout their lives. The Customer Lifetime Value (LTV) indicator is not exactly about this, although it is translated precisely as the lifetime value of a customer. However, domestic marketers often use the term “customer lifetime value”. LTV shows the profit from the attracted client for all the time while he stays with you.
LTV is calculated as follows: the total profit must be divided by the number of buyers. In this case, it is necessary to take figures only for the same period of time. Let’s say you earned 15,000,000 rubles in a year, and 1,000 clients used your services.
So the lifetime value of the clientwill be equal to 15,000 rubles. Unfortunately, this form does not give an entirely accurate result, since not all data are taken into account in the calculation. For example, customers who purchase your products from time to time, but did not make a single purchase during the reporting period, are ignored.
How it should be and how it is
So, you probably have quite logical questions: what is the cost of customersand what is optimal for your company? The answer to them must be sought in the ratio of LTV and CAC. We have compiled for you a simple and convenient scale that will help you determine the optimal ratio of these metrics:
- 1:1 or less. The bad news is your company is doomed to failure. If you don’t take decisive action and quickly improve the situation, then you will have to say goodbye to your business.
- 2:1. Unfortunately, your costs of attracting new customers almost do not pay off.
- 3:1. Your business model is working effectively. It is this ratio of LTV (customer lifetime value) and CAC ( customer acquisition cost ) that is optimal.
- 4:1. Your business is very productive, if you start using aggressive marketing campaigns, it will become even better. There are no boundaries for perfection!
Thus, the cost of a potential customer can be very different, it all depends on the success of your company and the marketing strategy used. How to achieve the coveted 3:1? Everything is very simple – change tactics, look for new channels of attraction, in a word – act! Water doesn’t flow under a lying stone, remember?
Now you understand that for a “healthy” business, you must independently calculate the main indicators, including LTV and CAC. You may be able to come up with ballpark numbers, but this is the only way to understand and analyze customer traffic, give your company marketer the right guidance, and scale your business to size over time.
Watch all marketing niches, let not only LTV and CAC, but also the cost of calling customers fall under your strict control. Control your marketers, but don’t forget to trust them! We wish your company continuous growth and constant profit!