In digital marketing, there are several key indicators of marketing success that Crimson Advantage helps clients assess. It’s important to ensure that a company’s marketing dollar is paying off with a sufficient ROI, and to make changes if not. One of the most important data points to evaluate is the ratio of LTV (Lifetime Value) to CAC (Customer Acquisition Cost). While this ratio is especially important for SaaS companies, it can be helpful for companies of all industries, including CPG’s.
LTV and CAC Definitions
A customer’s lifetime value (LTV), simply put, is how much a customer spends throughout their lifetime purchasing from you. If your company offers a subscription based product that’s $30/month, and the customer stays for two years, their lifetime value is $30 x 24 months = $720. To determine the LTV of a customer, multiply the average monthly revenue from said customer by the number of months they used your service.
Note: this will look a bit different if your company offers CPG’s. We recommend to assess their LTV if they’ve purchased from you over a period of 18-24 months. Perhaps your product offerings retail between $10 and $25; over the course of your customer’s 20 months since their first purchase, perhaps they’ve purchased a $20 item twice and a $10 item once. In that case, they’ve spent a total of $50 over 20 months, and their lifetime value is $50.
CAC, or Customer Acquisition Cost, is also commonly referred to as CPA (Cost per Acquisition). This determines how much money was spent to acquire the customer. This can be calculated by finding the sum of all marketing and sales expenses over a certain period of time, then dividing by the number of customers acquired. For example: If your company spent $5,000 on marketing and sales efforts in Q1 of 2019 and acquired 350 customers, the CAC per customer acquired in Q1 of 2019 is approximately $14.
What Is A Good LTV or CAC?
Many ask, “Well, what is a ‘good’ LTV or CAC?” This can only really be determined when these metrics are looked at together in the ratio LTV: CAC.
For example, imagine that your customer’s LTV is $90 and their CAC was $30. The ratio in this case would be 3:1, which is largely considered as a good ratio. 4:1 as a ratio is considered great, and 5:1 suggests that you could be investing more on the marketing side, or that your company likely has lower margins in a more competitive sector (lower margins entail that there should be a higher LTV:CAC ratio). Until these two data points are put together in a ratio format, it’s challenging to determine what a “good” LTV or CAC is independently.
ROAS
The LTV:CAC ratio is not the only metric that matters, however. The ROAS, or Return on Ad Spend, is also an important metric that factors directly into a CAC. The ROAS calculates what the return on investment was for a certain ad spend.
For example, if $25 was invested into ads and it created $100 in revenue, that’s a ROAS of 4 (because $100/$25). This $4:1 ad spend is a great ratio, but other companies may need a ratio like $100:1 to be profitable. It’s highly subjective to the company, their margins, and other factors. More conversion volume is needed to get campaigns to optimize to this target. A common pitfall is setting the initial targets too aggressively, and not giving the ad spend a chance to hit the performance goals.
Profitability
Finally, we seek to understand a company’s goals when we’re advising them on these metrics. Some companies seek profitability, some only care about breaking even, and some are okay losing money as long as they gain exposure for the long-term. These goals also determine what a good ratio of LTV:CAC is.
Here’s an example to help understand profitability: if your LTV is $128 and $32 was spent on CAC, that’s a 4:1 ratio, which is considered great. However, if $127 is spent on variable costs such as COGS before the $32 in ad spend, the 4:1 ratio means next to nothing. Money will be lost quickly.
At Crimson Advantage, we prioritize our clients’ goals, assess their current data points, and put a plan of action into place to achieve preferable ratios from a holistic viewpoint. Rather than prioritizing the LTV:CAC ratio, we also understand a business’s unique profitability and ROAS metrics to date and use these in crafting the strategy moving forward.
