Do you think that you spend too much on sales and marketing?
Are you a business owner and sometimes think that it costs you too much to acquire a new customer and that spending on sales and marketing might not be worth it? Don’t worry, you are not alone. Sales and marketing can be very costly, so why don’t you let the math do the thinking for you?
If you run the numbers of how much you spend on sales and marketing, otherwise known as Customer Acquisition Cost (CAC) and it seems too steep, don’t make any harsh decision to cut your spendings before knowing what the Lifetime Value (LTV) of one customer. When you compare it to the CAC, you may decide to spend even more on sales and marketing.
In this article, we will tell you everything you need to know about the Lifetime Value (LTV) of a customer compared to the Customer Acquisition Cost (CAC), how to calculate it and what the ratio means for your business.
The Ratio of Customer Lifetime Value to CAC is a way to estimate the total value that your company derives from each customer compared with what you spend to acquire that new customer.
How to Calculate It: To calculate the LTV:CAC you’ll need to compute the Lifetime Value, the CAC and find the ratio of the two.
Lifetime Value (LTV) = (Average Monthly Revenue per Customer x Gross Margin per Customer) / Monthly Churn Rate
Customer Acquisition Cost (CAC) = Total Sales and Marketing Costs for a specific period / New Customers acquired for that period
Let’s Look at an Example:
LTV = $10,000
CAC = $3,000
LTV:CAC = $10,000 : $3,000 = 10 to 3
What This Means and Why It Matters: To get the new customer it costs $3,000, but over his lifetime, the customer will pay the company $10,000 – making the company $7,000, which is the total value of a customer. That is more than twice what it cost to get him so it is definitely worth spending on sales and marketing to get him. The higher the LTV:CAC, the more ROI your sales and marketing team is delivering to your bottom line. However, you don’t want this ratio to be too high, as you should always be investing to reach new customers. Spending more on sales and marketing will reduce your LTV:CAC ratio, but could help speed up your total company growth.
If this article was helpful, check out our free cheat sheet: “6 Marketing Metrics Your Boss Actually Cares About.”