How can CAC and LTV optimize your marketing investments?
There are several metrics that indicate whether the company’s campaigns are efficient, that is, whether they bring a return to the business. Among them, CAC and LTV stand out as excellent performance indicators for the marketing and sales areas. In this post, we will talk a little about them, what they are, how they relate and how to calculate them. In addition to showing how analyzing these numbers can broaden your view of the sales cycle and optimize your marketing investments. Check it out!
What is the definition of CAC and LTV?
Customer Acquisition Cost (CAC)
The definition of CAC is the average amount spent on direct actions to acquire customers. That is, it shows how much a company is investing to acquire each new customer.
Efforts to acquire clients range from attracting website visitors and nurturing leads to closing the deal. Therefore, you need to analyze the sales funnel to calculate the CAC more easily and to identify possible adjustments that improve this metric.
Customer Lifetime (LTV)
LTV is the metric that calculates how much the customer brings in profit after being acquired. It measures how much the business makes to the customer over the entire time that it maintains relationships with the company. This is an indicator of the quality of the customer experience.
The relationship between the two metrics
CAC and LTV are essential metrics for decision making within a business, especially for marketing and sales. Ideally, the CAC should be as small as possible, while the LTV should be maximized.
If the CAC is larger than the LTV, it’s a sign that something is not going well. You have to cut spending or invest in post-sales actions for customer retention. On the other hand, a CAC well below the LTV may indicate a waste of the company’s growth potential.
How to calculate these metrics?
The calculation of the CAC is made by the sum of the investments in marketing and sales, divided by the total of new clients acquired in the period.
To facilitate, start by excluding other expenses such as administrative, support and product development. Focus on marketing and sales, directly linked to customer acquisition, and consider everything that involves the stages of disclosure, relationship, and sales:
- paid media;
- participation in events;
- press office;
- sales commissions;
With regard to the number of customers, it’s worth mentioning that only those that are directly acquired by the marketing and sales teams should be considered. Spontaneous acquisitions or from other channels, whose investments were not considered in the calculation, should not be accounted for.
To calculate LTV, you need to know the average ticket and how long, on average, the customer’s relationship with your company lasts. The LTV is given by multiplying these two.
How does it optimize marketing investments?
Once you have understood what these metrics are and how to calculate them, it’s time to understand how to use them to optimize marketing investments in your company.
These metrics provide an overview of how resources are being applied as well as the impacts on the company’s results. Thus, a CAC greater than the LTV indicates that it is necessary to cut costs, analyzing the investments that give less return and reducing them.
In addition, it’s important to focus on the efficiency of actions to bring more customers. One good way to achieve this is to use marketing automation tools, such as Microsoft Dynamics 365. By automating processes, the digital marketing team manages to deliver far more results with less effort.
Likewise, if the LTV is much higher than the CAC, it’s worth investing a little more, giving preference to the best performing channels.
As we’ve seen, CAC and LTV are indicators of a company’s financial performance and cannot fail to be monitored. With them, it’s possible to measure whether the efforts in outreach and marketing are bringing returns and identify the necessary adjustments.
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