When you’re running a business, knowing two key metrics — Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLTV), will make or break your marketing.
But don’t worry, it’s not as complicated as it sounds.
Here’s a simple breakdown:
Step 1: How to Measure CAC
Customer Acquisition Cost (CAC) – is the cost of acquiring a new customer. Here's how to calculate it:
CAC = Total Marketing & Sales Expenses / Number of New Customers Acquired
If you spent RM10,000 on ads, staff, and tools last month, you got 100 new customers. Your CAC would be:
RM10,000 / 100 = RM100
That means you're paying RM100 to get each new customer.
Step 2: How to Measure CLTV
Customer Lifetime Value (CLTV) tells you how much revenue a customer brings over their entire relationship with your business. Here’s the quick and easy formula:
CLTV = Average Purchase Value x Number of Purchases x Average Customer Lifespan
For example:
- Average purchase value = RM50
- Average number of purchases = 4
- Average customer lifespan = 24 months
Your CLTV would be:
RM50 x 4 x 24 = RM400
This means each customer is worth RM400 over their lifetime.
Why These Numbers Matter
How can anyone do marketing without knowing their numbers – CAC and CLTV?
If you hire a marketer, do they simply pull a "marketing budget" out from the air, based on "gut feeling"? Or do they recommend a marketing budget based on the business metrics?
Knowing your CAC and CLTV is also important to measure if your marketing efforts are worth it.
I don't believe there should be a golden rule. But people tend to quote that your CLTV should be at least 3 times your CAC – otherwise, you're probably spending too much to get customers.
Of course, this depends on the nature of the business, products, and services.
Action plan: What's your business CAC and CLTV? Spare 30 minutes today to calculate it.
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