What do CAC and LTV mean to your company? Believe me, knowing how to calculate this alphabet soup will help you to have better results in the company. Learn!
CAC and LTV are fundamental allies for the growth of any company that invests time and resources in marketing and sales strategies.
While managers try to identify which methods are best to achieve this goal, doubts may arise about the effectiveness of these means and about the options that guarantee results at a lower cost.
These are the roles of CAC and LTV within any business. Do you know how these metrics indicate the viability of a business?Bottom of Form
Know the strategies to optimize your numbers?
In this post, we’ll show you:
- What is CAC, how to calculate it, and what metrics you should look at to optimize these numbers;
- What is LTV, how to calculate it, and what metrics you should look at to optimize these numbers;
- Bonus: How to Calculate Marketing ROI.
Read and seek answers to your questions. If you still have your head boiling with doubts, just leave your comment at the end of the text.
We will be happy to answer any questions you may have about CAC and LTV. Good reading!
Understanding what CAC is
This acronym, which stands for Customer Acquisition Costs (or cost for acquiring customers), defines the amount spent by the company to transform a lead into a buyer or a user of the services offered.
The CAC calculation is defined after the survey of all marketing, sales, team and operation costs during a period of time.
This result is then divided by the number of customers acquired at the same time.
How to calculate CAC
To calculate the CAC, simply calculate your total customer acquisition cost (marketing, sales team cost, etc.) divided by the total number of new customers. The result will be CAC. The formula is this:
- Total cost for customer acquisition / Total new customers = CAC
Why is calculating CAC critical to your business?
The indication of CAC numbers indicates whether your company’s business is healthy or not.
From there, the marketing team has a guide to be more strategic in the decisions it takes to attract customers.
After all, only by understanding how much is spent to place customers within the base is it possible to optimize investments.
It needs to be clear from the beginning that CAC and LTV cannot have similar numbers. The first needs to be much smaller than the second.
Otherwise, no company will have financial health in the medium and long term and will be doomed to failure.
Therefore, it is essential to identify bottlenecks and take immediate action to reduce CAC (we’ll talk about how to do it below).
Understanding what LTV is
In turn, Lifetime Value (LTV) identifies the value that each customer left in your company over the period that he consumed your products and services.
The analysis of this data requires special attention regarding the type of business.
Low-value goods and recurring use tend to generate customers who return frequently, while high-value goods are more sporadic purchases—at least for most people.
How to calculate LTV
The formula for calculating Lifetime Value is:
- (Average Value of a Sale) X (Average Retention Time in months or years for a typical customer) = LTV
Why is calculating LTV critical to your business?
Clearly understanding LTV numbers is critical to a number of strategic decisions in any business.
CAC and LTV, by the way, need to work together. Only then do companies know if they spend more to acquire or retain customers.
That said, the LTV calculation is important to analyze, too:
- Duration of the relationship between company and customer;
- Amounts invested to acquire and maintain new customers;
- A profitability that new customers add to the company.
Why worry about CAC and LTV?
LTV needs to be bigger (heavier) than CAC
The analysis of these metrics indicates the viability of a business and directs the most appropriate actions to promote the acquisition of new customers, depending on the return they can offer.
Imagine that, when calculating CAC, a manager discovers that he has invested an X amount to reach each of his customers.
However, throughout their consumption history, each of them left only 2/3 of X in the company.
It doesn’t take an extraordinary mathematician to realize that this relationship is harmful to the organization, right?
Therefore, when CAC exceeds LTV, managers need not only to be on the alert, but to consider considerable changes in their customer acquisition actions.
After all, your ability to monetize them is less than the cost to acquire them.
How to optimize CAC and LTV numbers?
CAC and LTV
At this point in the text it is already clear that the CAC and LTV numbers cannot be close, right? The first must necessarily be much smaller than the second.
To increase this distance between them, what can be done to guarantee an equation favorable to the organization?
See some suggestions below:
How to increase LTV
The first option is to increase the LTV. For this, the solution is to think about what can be done so that the customer leaves more money in the company during his period as a buyer.
This can represent both efforts to increase the average ticket and actions to retain it, keeping it longer as a user of its services.
To do this, ask yourself: what value does the customer extract from my product or service? Based on this answer, it is possible to offer him a little more, generating higher billing and, consequently, increasing LTV.
Logically, the measures for this vary according to each sector. In a store, it can represent the offer of a mix of more varied and complementary products, making the customer leave with a fuller bag.
For an insurance company, it may be to offer additional coverage at a special price, guaranteeing the purchase of more than one service.
In the IT sector, it is normal to link new modules and additional products, those that add greater value to the average ticket. This starts with selling to base customers.
These actions to bring sales to the base also enable co-creation, where the customers themselves support with ideas and investments in customizations.
This makes the product have growth and better remuneration and value perception.
CRM for IT, an ally to sell more and better and reduce costs in companies
Did you not understand any term in the text? Access our glossary of sales terms now!
How to reduce CAC
Another option for optimizing your company’s numbers is to reduce CAC. For this, an analysis of the metrics will help you make the best decision.
An efficient measure to reduce the CAC is to guarantee a quality service.
Satisfied customers return, reducing the need to invest to attract a large amount of new buyers to replenish the churn rate.
In this area, deeply assessing who your target buyer is with your actions is fundamental.
Improve inbound and outbound sales strategies as well as the level and specialization of sales teams between hunter, inside sales and farmer executives, as well as digital actions, social selling, content marketing and other diverse forms of complementary sales strategies that can reduce CAC costs.
ALSO READ: Customer Acquisition Cost: 5 actions to reduce CAC in your company How can content marketing reduce CAC?
Analyze marketing ROI
Another important action is, through the CAC, to analyze which marketing actions offer the best return on investment.
Thus, it is possible to focus the application of resources on the most efficient ones to ensure an increase in revenue and the company’s financial health. Well, that brings us to another question…
How to calculate ROI?
To calculate the Marketing ROI, after understanding the CAC and LTV, just follow the formula:
- (Return on investment – cost of investment) / cost of investment
A company has R$ 400 thousand monthly in sales team results. The marketing team joined the commercial team to promote actions and training that cost R$ 50 thousand.
These actions made monthly sales double: they reached the value of R$ 800 thousand. With this formula, we have: (400,000 – 50,000) / 50,000 = 7.
Thus, we have a return of R$7.00 for each real invested. An impressive 700% return on your marketing investment!
With CAC and LTV metrics in hand, managers can understand and analyze Marketing ROI. These numbers make it easier for the company to reduce costs and improve its indicators and profit.
So, how can we help you?.
Take the opportunity and read our article that talks about the importance of customer relationships and another that addresses lead qualification in sales prospecting.