Customer acquisition cost – The metric that determines the fate of a company’s future. It is a metric that is often mentioned in financial reports. With the advent of internet-oriented companies, we can now accurately calculate it. This applies to targeted marketing campaigns where we track the user’s behavior from their first interaction to the moment when they convert. This gives us a complete picture about this success indicator. The CAC is the price that we pay for someone to buy our product. LTV, or Customer Lifetime Value, is another metric that complements the success and value of CAC. This is the sum of all payments received from a particular user. Why is this important?
If the CAC is higher than the LTV, it means that we are charging our customers too much to use our tool. We are operating at a loss if the CAC is higher than the LTV.
($) Monthly revenue per customer = ($) LTV
An LTV to CAC calculation is intended to show how well our company is positioned to grow. This ratio is a key performance indicator (KPI), which allows us to determine how much (or little) we spend on marketing and sales in order to maximize our growth and stay ahead. However, this forecast can change quickly. The LTV can drop if there is a new competitor in the market or rise if there is a positive and significant change to the product. This is normal and expected. We are constantly improving our formula. Creating a dashboard that visually represents your situation will help you to define and measure these metrics will be helpful. It’s easier to see the true value of these metrics when they are right in front of your eyes. You can find many easy-to-use applications that do this. I recommend downloading one. We know the CAC with Adwords, Facebook, and other channels. We have an LTV dashboard that shows the profitability of advertising at all time. This allows us to encourage marketing budgets to be redirected to channels that have a healthy LTV. We now have a live campaign reporting dashboard where we can see the profitability of advertising at all times. This calculation may be relevant to your business. If the answer is no, then you can discard it. You can make your own calculations and still achieve a positive profit rate.