It takes time (usually several years) to get LTV right. This means that the business must have a constant customer base and the product must not change much.
LTV helps determine how much a business needs to spend to attract new customers. LTV should be more meaningful than CAC, because it is not advisable to spend more money on customer acquisition than the total value they bring to the business.
Revenue outflow ratio = (Lost revenue for a particular period – Increase in sales for that particular period) / Revenue at the beginning of the period.
The current LTV formula for SaaS shows gross profit, not revenue. If the average revenue per customer is $50, the gross margin is 10%, and the churn rate is 5%,
We recommend calculating the LTV for each
It is also worth encouraging customers for long-term interaction by introducing bonuses for regular customers, discounts, exclusive offers, etc.
Encouraging customers for long-term cooperation
Rice. 1 – Encouraging customers for long-term cooperation
Above we see an example of an incentive for further purchases from the cashback service — with each new order, the user approaches the maximum loyalty provided by the company.
CAC – customer acquisition cost
CAC (Customer Acquisition Cost) measures the total cost of attracting a new customer to a product or service. Usually, when people talk about CAC, they mean marketing resources and sales. However, CAC also includes human and technical resources (salaries, rent, software for employees, etc.).
CAC in simple words is how much a new customer is worth to the business (another name is User Acquisition Cost).
Calculating CAC helps determine the economic viability of a business and whether or not sales and customer acquisition costs should be adjusted.
Advantages of using the CAC indicator:
Shows the ROI (marketing return on investment) and effectiveness of different strategies and channels.
Gives knowledge about the cost of customer acquisition – whether customer acquisition costs more than the profit received.
Similar to LTV, CAC shows whether a business needs to invest more in its product or to suspend and optimize spending.
Every business expense directly depends on CAC and plays a role in the operation of the business model. CAC is highly subjective, so there is no such thing as a high or low customer acquisition cost that can be applied to every company.
To determine the CAC metric, the sum
of sales and marketing costs must be divided by the total number of customers acquired. Typically, companies calculate CAC quarterly or annually.
CAC
CAC will vary by industry, stage of business development and customer segment.
How do you know if a “good” CAC has a business?
To find out if your business’s CAC is a “good” number, compare it to industry benchmarks. In 2021, Shopify surveyed 270 e-commerce business owners in various industries to find out their average CAC. Here are the numbers:
That is, for some, the CAC is normally $500, for some, $21 is a normal figure.
Other business factors should also be considered. For example, if the company is a start-up, it is assumed that there are significant start-up costs as the business is just setting up operations and building a brand. But with the growth of the business, you can expect more recommendations from customers and the results of previous promotion activities (search engine optimization, contextual advertising, etc.), which may well contribute to reducing costs.
Also consider the product price, sales cycle
and business model. Attracting new customers is necessary, but at the same time, you should not forget about previous and current users. Customer retention affects overall business development and marketing efforts. Therefore, you should not only calculate CAC, but also pay attention to the LTV:CAC ratio.
LTV:CAC measures the relationship between the long-term value of a customer and the cost of acquiring that customer. First of all, this indicator should be monitored by companies that work on a subscription model (subscriptions for services).
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The LTV:CAC ratio is a metric that compares
the amount a business spends to acquire a customer to the amount customers plan to spend with the business over their lifetime (ie customer lifetime value, or LTV).
The benchmark for a good LTV:CAC ratio is 3:1 . In other words, for a business to remain profitable, LTV must be 3 times higher than the cost of acquiring a customer.
An LTV:CAC ratio of less than 3:1 means you’re spending too much to acquire customers who aren’t spending enough on your business. The return on investment in sales and marketing is low, that is, it is necessary to optimize the strategy of attracting customers.
Incorrect pricing strategy
Overhead costs are too high.
Conversely, if your LTV:CAC ratio is too high (eg, more than 5:1), you may be spending too little on sales and marketing and missing out on capturing more market share.
Regarding the normal LTV:CAC figure: we found fresh statistics from First Page Sage . The company analyzed LTV to CAC ratios for 29 industries.
We started by determining the average LTV and CAC for each industry over 3 years and then calculated the LTV:CAC ratio. We collected the data included in the table between 2019 and 2024. 68% of the data was obtained from organic marketing channels , and 74% – from B2B companies. Our clients are medium and large companies. Also, early-stage companies will spend more on customer acquisition and therefore see lower LTV:CAC ratios.
In order to understand your LTV:CAC, it is also important to determine the break-even point of the business – when the cost of acquiring customers equals the revenue received from those customers.
There are 2 typical scenarios in business:
the client performs the conversion once;
the client places an order regularly (within a certain period of time).
A one-time purchase speaks for itself – it is unlikely that the customer will make further purchases. That is, for a business, the income from a one-time order must exceed the total costs of attracting this customer. If expenses turn out to be higher than income, it will be unprofitable for the business.
Regular conversions ensure high LTV. Here, it is important to establish a relationship between the cost of attracting a customer and his lifetime value. The revenue from the first conversion may be below the break-even point, and subsequent purchases will pay for the cost of acquiring the customer.
Therefore, the customer base should be segmented to form a better development strategy and advertising targeting. And then look at the conversion cost and engagement costs in the context of each user group.
Customer segmentation and engagement offers
Rice. 4 – Customer segmentation and engagement offers
For example, as in the picture above — to attract existing customers who have not placed an order for a certain time. The store tries to win back the loyalty of existing customers and encourage them to make purchases using the method of promotion and personal discount. Currently, the attraction channel from the example is email marketing .
It is advisable to calculate LTV:CAC separately for each selected user segment. And depending on the obtained figures, optimize the promotion strategy — direct the main expenses to potentially more profitable segments, because it is these consumer groups that ensure the viability of the business. However, don’t forget about “one-time” customers — encourage them to return to the site or application and make repeat purchases.
CRR – customer retention rate
CRR (customer retention) is the level of customer nepal phone number resource retention. By retaining customers, a business increases LTV, which can also affect CAC.
Customer Retention Rate (CRR) gives an idea of how well a business is doing in retaining existing customers. Specifically, CRR refers to the percentage of customers who choose to continue interacting with a business over a period of time.
Attracting new customers is important, and keeping america email existing ones as long as possible is just as important. Retaining a customer is almost always more cost-effective than acquiring a new one, it increases LTV, and for subscription-based services it is important to understand business performance.
Knowing your customer retention rate allows you to better plan future spending, and it also helps to warn of low customer satisfaction and the need to increase loyalty if necessary. A high CRR means that the business is doing well and has enough engaged users.
