The Impact of Understanding Customer Acquisition Costs and Customer Lifetime Value

The Impact of Understanding Customer Acquisition Costs and Customer Lifetime Value

Have you heard someone talk about customer acquisition cost (CAC) or customer lifetime value (CLV or LTV)? If you’re in the tech business, and especially if you work with SaaS products, you’ve definitely heard of, and can likely calculate, these values. CAC is how much you spend to acquire a customer. CLV is the net value of a customer to the company–how much money a customer spends during their entire relationship with you, minus the costs of products and services they buy. Used together, these numbers help drive your overall business strategy, including your marketing approach. After talking, we determined we needed to acquire a job/customer for $35 if the emergency clog removal was all they sold–a very challenging number to achieve in a market as big and competitive as Charlotte. They needed to increase the lifetime value of a customer. If you’re in professional services, use the numbers to understand if you need to focus on getting more repeat business or acquiring new customers. John makes the point in this blog post that CLV is unlimited if you have delighted customers because they refer you, and those referrals have no CAC. Which products or services should I concentrate on to get the customers I want to work with, and who are also profitable for our company?

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The Impact of Understanding Customer Acquisition Costs and Customer Lifetime Value

It’s guest post day here at Duct Tape Marketing, and today’s post is from Dan Kraus – Enjoy!

Have you heard someone talk about customer acquisition cost (CAC) or customer lifetime value (CLV or LTV)? If you’re in the tech business, and especially if you work with SaaS products, you’ve definitely heard of, and can likely calculate, these values. If you’re not in the tech industry, you should learn about these numbers, as they have enormous value for businesses of every type and size.

CAC is how much you spend to acquire a customer. In the simplest of calculations, it’s the amount you spend on sales and marketing divided by the number of customers you get during the period you’re measuring.

CLV is the net value of a customer to the company–how much money a customer spends during their entire relationship with you, minus the costs of products and services they buy.

Used together, these numbers help drive your overall business strategy, including your marketing approach.

Here’s a simple example. I met with a plumbing services business that cleans out drains as their primary business. We talked about their starter offer (how they get new clients in the door), which focused heavily on emergency clog removal through their 24-hour hotline.

They historically charged $149 for an emergency cleanout. Their loaded cost to do this, including technician time, vehicle wear and tear, and materials, was about $70. They wanted to clear a net profit of 20% ($30). Backing the cost and profit allocation out, we had $49 left to cover marketing and non-allocated overhead. After talking, we determined we needed to acquire a job/customer for $35 if the emergency clog removal was all they sold–a very challenging number to achieve in a market as big and competitive as Charlotte.

So we…

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