Are You Wasting Money? What is Your Customer Acquisition Cost? What’s Your LTV?

Your Customer Acquisition Cost or CAC is the total cost spent on acquiring new customers (marketing/sales expense) divided by the number of new customers acquired during that particular period.

If you invested $1000 in marketing/sales in a one month period and acquired 100 new customers as a direct result of that marketing and promotion, then your acquisition cost is $10 per new client.

All successful businesses measure their acquisition costs. Luckily, promotional activity on the web can be measured very accurately.

Some people have the philosophy of making sure the pricing of your products and services cover your CAC. This is obviously good to do when the sale is a one off. However, I like to look at LTV (Lifetime Value) of a customer.

Lifetime value is a little more involved in the calculation and many business owners look at it as too risky. As a marketer, it’s all about the numbers for me. In order to understand we’re going to have to get technical and use a bunch of numbers. If you’re ready – let’s get into it.

We need to come up with a business/product/service. This works for almost all businesses that have repeat customers, like barbers, restaurants, massage therapists, chiropractors, dentists, etc., etc. Let’s pick Restaurant.

Let’s say the average spend at this restaurant is $30 per person (a food item and 1 drink, plus tip).
Let’s say you do a great job wowing the customer and now they come once a month for 10 months per year on average. That means you’ll bring in $300/year from that one customer.

This is where the magic happens when you include LTV in the calculation:

While your competitor is only willing to spend $10 to acquire a customer, you know you can out spend them. You know you can spend double, triple, even 5x more than your competitor and you’ll still come out better.

Why? How?

#1 your competitor did not get that customer, you did
#2 you know that customer is worth $300
#3 you know that the upsell program you’re about to implement will increase check sizes by at least 17%

So if your CAC is $50 and your average ticket price is $30, you’ll make that up in a few visits.

The biggest problem I discover is, most businesses do not know the lifetime value of their customer. They only look at the transaction as the determining factor, not the customer loyalty.

When it comes down to it, the business that can pay the highest to acquire a customer, wins.

Have any questions, comments, or concerns? Let me know by sending a private message [HERE]