What are Lifetime Value and Customer Acquisition Cost? Let’s begin by examining Lifetime Value.
What is Lifetime Value?
Lifetime Value is the total value of a customer over the lifetime of their relationship with your company. The more they purchase from you, and the longer they stay with you, the higher the Lifetime Value, the more you can do to earn a new customer and keep them happy.
Consider two examples: an insurance company and a child selling lemonade in the park. The lemonade vendor will likely see customers once or twice, resulting in an average customer lifetime value of approximately $1 to $1.50. On the other hand, insurance company customers have a higher lifetime value as they pay monthly premiums. Over a 10-year period, this lifetime value could amount to more than $240,000.
Now, how does Lifetime Value relate to Customer Acquisition Cost?
This is where CAC comes in. What is Customer Acquisition Cost?
CAC (Customer Acquisition Cost) is how much you can spend to acquire one customer. It’s a key marketing and finance component and will really help in marketing campaigns. Back to the question, “How does Lifetime Value relate to Customer Acquisition Cost?”
The latter is determined by comparing the lifetime values of different businesses. For instance, while the insurance company can spend over $240,000 to acquire a customer, the child selling lemonade can only afford to spend less than $1. This is because one customer is worth only $1 to the child, whereas an insurance customer is valued at over $240,000.
To calculate Customer Acquisition Cost, first identify your average customer’s lifetime value. Then apply this formula: Customer Acquisition Cost equals the combined cost of sales and marketing divided by the number of new customers acquired.
For example, suppose a manufacturing company spends $10,000 on marketing and $5,000 on sales while acquiring 200 new customers. Their Customer Acquisition Cost would be calculated as follows: ($10,000 + $5,000) / 200 = $75. Thus, they can allocate $75 to acquire each new customer.
So How do you increase the Lifetime Value (Thereby incasing the CAC)?
The best and easiest way is to make your product/service subscription-based. This automatically increases the Lifetime Value as the customer is guaranteed to spend money every month. Another way companies increase Lifetime Value is by adding a point system or a reward system and once a customer has bought a certain amount they are given a discount.
Sometimes you could make a community for your customers, motivating them to buy more for you. You can form community’s by staying active in social media, community boards and other medias.