How to Optimize CAC and LTV

If you work in marketing and sales, you know that acquiring a customer costs money. Indeed, customers don’t just show up on their own, and you have to invest to attract and convert them. The crux of the matter here is how to keep that customer acquisition cost (CAC) as low as possible, and how to ensure that once a customer is converted, they stay with us as long as possible while increasing their spending with us (LTV). That’s what we’re going to discuss in this post. You’re interested, right? Well, let’s get started.

As you know, CAC is simply the Customer Acquisition Cost—that is, the financial investment we’ve made for each new customer we’ve acquired.

In other words, if we have invested a total of 10,000 euros in our online marketing campaign and have acquired a total of 200 customers through it, the average CAC, or customer acquisition cost, would be 50 euros.

This is how we would roughly calculate the cost of acquiring a new customer. However, it’s advisable to break down this calculation by acquisition channel—that is, for SEO, SEM, social advertising, programmatic advertising, etc. This way, we can optimize each channel individually in a much simpler and more effective manner.

CAC is useful not only for determining how much a new customer costs me, but also for seeing whether the investment I’m making is profitable. For example, if it’s costing me 50 euros to acquire a new customer through social media, and my product sells for 60 euros, it’s not particularly profitable for me. However, if the CAC is 200 euros and the sale is 2,000 euros, that changes things quite a bit.

LTV, or Lifetime Value, however, tells us how much money a customer of yours will spend with you over the entire time they remain a customer.

This is another key metric for your business, because if you want to be successful, you’ll need to get your customers to spend more and stay longer, so that they ultimately leave you with more money than you spent to acquire them. Ideally, for the cost of each new customer to be profitable, the CAC should represent 10% of the average lifetime value (LTV).. This is why it’s so important to compare these two metrics. The LTV must, without exception, be greater than the CAC.

This metric is also important because it will tell you how much you can spend on acquiring new customers. If you can also break this down by acquisition channel, you’ll be able to determine which of those channels are the most profitable for your marketing investment, since it will show you the LTV and CAC per channel, allowing you to prioritize and optimize your channels.

LTV, or customer lifetime value, is calculated as follows.

LTV = Average customer spend × acquisition frequency × number of years the customer has been with us.

In addition to this formula—which is perhaps the simplest—there are other ways to calculate it, some more accurate than others, and some more tailored to your business. Another widely used method involves adding up your customers’ monthly revenue over a given period and dividing it by the total number of customers during that period. This will give you figure 1 (let’s call it that). Next, divide the total number of customers who have left (canceled their service) during the time period you’ve chosen to analyze by the total number of customers, and this will give you figure 2. All that’s left is to divide figure 1 by figure 2, and you’ll have another way to calculate LTV. I recommend that you explore which method works best for you. If you have any questions, feel free to ask us.

As you’ve seen, you can’t calculate the CAC without first calculating the LTV.

Imagine that in your business, you calculate the LTV for new customers and come up with a figure of 300 euros for a 6-month period. This means that, over the course of 6 months, each new customer spends 300 euros at your business.

If you then calculate the CAC for the campaigns you ran during those 6 months—the ones that brought in those new customers for whom you calculated the LTV—and you get a figure of 180 euros, that means each new customer costs you 180 euros and brings in 300.

Ideally, you should regularly compare your business’s LTV with its CAC, since the customer lifecycle can vary due to factors such as an increase in churn, which would cause the LTV to decrease while the CAC remains the same. If this were to happen, it would be a clear sign that you may have a problem.

Now that we have a clear understanding of these concepts, let’s see how we can optimize customer acquisition costs and customer lifetime value.

How to Optimize Customer Acquisition Cost and Lifetime Value.

Although it may seem obvious, this first piece of advice I’m going to give you is something very few people actually do: measuring these two metrics. If you don’t start by knowing your LTV and your CAC, it’s impossible to optimize them.

As for CAC, as I mentioned earlier, ideally you should know the customer acquisition cost for each of the channels you use, so you can optimize them one by one to spend less and convert more.

To help you with this, there are many tools available to assist you in conducting experiments and A/B tests, which will allow you to gradually lower your CAC.

Here are some recommendations:

• Focus on optimizing your landing pages and website for conversion. There’s no point in attracting more and more traffic if you can’t turn that traffic into customers—or at least leads.
• Highlight the USP of what you sell or what your customers value most about you. If most users have shown interest in a particular feature of your product or service, take the opportunity to highlight it on your landing page or website to help increase conversion rates.

When it comes to LTV, or customer lifetime value, there are different ways to optimize it, such as:

• Implement upselling and cross-selling strategies. This involves increasing the value of your customers’ experience by offering them an upgrade for less money—for example, a higher-tier room for just 50% of the difference—or by selling complementary products, such as a matching belt when they buy a pair of shoes.
• Invest in customer retention. This is essential for the sustainability of any business. You can acquire more and more customers, but without repeat purchases or customer loyalty, it’s impossible for that business to survive. To achieve this, having a retention strategy is essential. If we increase customer satisfaction, communicate with them, and build a strong relationship, LTV will increase.

As you can see, these are variables that every marketing team must monitor and take into account. To do so, it’s helpful to automate processes and metrics, as well as to have the right specialists on hand to help you optimize your marketing and PPC campaigns. At MioGroup, we can help you with both. Shall we talk?