Do you ever find yourself wondering what your marketing dollars are actually doing for your business? A lot of business owners struggle to justify marketing spend, but only because they don’t fully understand its value.
So, it’s time to demystify the world of marketing spend and put some fears to rest. In order to do that, we have to gain an understanding of two metrics: Client Acquisition Costs (CAC) and Customer Lifetime Value (CLV).
Calculating Acquisition Costs for Service-Based Businesses
Alright, Customer Acquisition Cost may seem like a fancy term, but the formula is actually pretty straightforward.
You take all your marketing and sales expenses for a specific period, say a month, and divide that by the number of new customers you snagged during the same time.
By working this out, you can put a dollar value on each new customer to your business.
CAC =
Total Marketing and Sales Expenses
Number of New Customers Acquired
So, how much does each client cost for your business to acquire?
For example, if you spent $10,000 on marketing and sales efforts in a month and acquired 100 new customers during that same month, your CAC would be $100 per customer.
CAC = Total Marketing & Sales Expense / Number of New Customers Acquired
CAC = $10,000 / 100 = $100 per new customer
How does this CAC stack up against what each client is worth to you? Let’s find out by calculating the CLV…
Calculating Acquisition value for service-based businesses
Now you know how much each client costs to acquire, it’s time to work out how much value they will bring to your business over your entire relationship. This calculation works out the Customer Lifetime Value, and it’s where you start to understand the real ROI in marketing.
Here’s a basic formula to calculate CLV:
CLV =
Average Purchase Value X Purchase Frequency X Customer Lifespan
Customer Churn Rate
What do these terms mean?
Marketing has a lot of jargon! So we are on the same page, here are a few key definitions that we will discuss in this article:
- Average Purchase Value: The average amount of money a customer spends per transaction.
- Purchase Frequency: The average number of purchases a customer makes within a certain time frame (e.g., per month, per year).
- Customer Lifespan: The average length of time a customer continues to do business with your company.
- Customer Churn Rate: The rate at which customers stop doing business with your company (expressed as a percentage).
Putting the data to work
Armed with CAC and CLV data, you can start to make informed decisions regarding your marketing strategies.
You can use this information to contextualise and justify other costs in your business, like additional marketing costs, lead generation strategies, paid advertising, extra resourcing and extra staffing.
Tools and Resources for CAC Analysis
Fortunately, you don’t have to manually do all these calculations. Many customer relationship management systems and analytics platforms have built in tools and resources for CAC and CLV analysis.
Plus, there are a heap of great (and free) calculators online that will help you easily calculate CAC and CLV.
By calculating the costs vs the value of your customers, you can gain a better understanding of the financial dynamics of acquiring new customers and their long-term value.
Armed with this knowledge, you can optimise your marketing strategies, allocate resources effectively, and drive sustainable business growth.
