Like most of us, you undoubtably have a lot on your plate. You’re constantly making decisions about how to acquire new customers and grow your business, all while trying to make sure that those efforts are profitable. That’s why it’s more important than ever to know your customer lifetime value (CLV).
Knowing your CLV to customer acquisition cost (CAC) ratio will give you valuable insight into whether you are acquiring customers profitably, aggressively pursuing market share, or sitting on cash not growing as fast as you could. In short, knowing your CLV unlocks doors to better decision making.
SO HOW DO I CALCULATE CLV?
It’s pretty simple — the formula is simply total revenue over total number of customers over time. That means that in order to figure out your customer lifetime value, all you need to do is look at the amount of money each customer brings in from the first sale until they eventually churn (stop buying from you).
Once you have an accurate measure of your CLV, it’s time to look at that number relative to your customer acquisition cost (CAC). Your CAC is exactly what it sounds like — the amount of money it costs for you to acquire a new customer. This metric should be tracked diligently because if CAC rises too high above CLV then it indicates that something needs to be tweaked in order for the business model to remain sustainable.
You can also use CLV and CAC together when planning out marketing campaigns and deciding which channels are most effective for acquiring customers. If one channel has a lower CAC than another while delivering similar results in terms of acquiring customers and driving sales, then this channel should become the focus going forward.
Knowing these metrics makes it easy for marketers and eCommerce professionals alike to make informed decisions about where your resources should be diverted for maximum impact. Our CVO Program also helps 😉
So next time you're thinking “I don’t care about customer lifetime value - we’re trying to grow!” take a step back and think about how you can leverage your CLV to enhance your growth. With an accurate knowledge of CLV and CAC ratios, you can leverage your resources more efficiently in order maximise growth and stay ahead of the competition.
Now go forth and smash those growth targets! 💪🏼
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