Tips for Founders - Concentrating on CAC vs CLV

Tips for Founders -

Concentrating on CAC vs CLV

As a founder, it’s essential to maximize the value of every customer you acquire. At the beginning stages of your business journey, you clearly won't have the historic customer data to pull meaningful lifetime data on your clients, outside of using industry averages as a benchmark. That’s why it’s important to understand and optimize the relationship between customer acquisition cost (CAC) and customer lifetime value (CLV) as early on as possible.

Within this newsletter we will cover the following areas:

1. What is CAC & CLV? 
2. How to measure CAC
3. How to measure CLV
4. Optimizing CAC vs CLV
5. Reducing CAC
6. .Increasing CLV
7. Examples

What is CAC & CLV?

CAC is the total amount spent to acquire one customer, while CLV is the total amount of revenue generated from one customer over their lifetime. By understanding and optimizing the relationship between the two, founders can maximize the return on their customer acquisition efforts.

How to measure CAC

In order to accurately measure CAC, you should start by understanding your customer base. Analyze your customer data to determine who your best customers are, what channels they’re using to discover your business, and what’s driving their purchase decisions. This will help you identify the most cost-effective ways to acquire new customers.

Next, you’ll need to track your CAC by channel. This means calculating the cost of acquiring a customer via each channel, such as email, display ads, organic search, and social media. To do this, you’ll need to track your marketing investments by channel and compare them to the number of customers acquired from each channel. You can then calculate your CAC for each channel by dividing the total costs by the number of customers acquired.

CAC = (Customer Acquisition Costs) / (Number of Customers Acquired)

Finally, it’s important to track your CAC over time to see how it changes as your business grows. This will give you an indication of how well your customer acquisition efforts are working and whether or not you’re acquiring customers at an acceptable cost.

How to measure CLV

Understanding how to measure CLV is essential for founders to make informed decisions about how to best allocate resources, such as marketing and sales efforts, to maximize customer profitability. By understanding a customer’s CLV, founders can identify which customers are most likely to provide the best return over time and can focus their efforts on those customers.

So, how do founders measure their customer’s CLV? The first step is to determine the average customer lifetime. This can be done by tracking the average length of time customers stay with the business and the rate of customer churn, if you don't have the historic data to work off, you can utilize industry benchmarks as a starting point. Once the average customer lifetime is established, the next step is to calculate the customer’s average value. This is done by taking the total revenue generated by a customer during their lifetime with the business and dividing it by the total number of customers.

Once the average customer value is established, the next step is to determine the customer’s CLV. This is done by taking the average customer value and multiplying it by the average customer lifetime. This gives the founders a baseline for understanding how much each customer is contributing to their business over time.

CLV = (Average Value of a Sale) x (Number of Repeat Transactions) x (Average Retention Time Period)

From there, founders can begin to refine their CLV calculations by taking into account other factors, such as customer loyalty and customer referrals. For example, a customer who is loyal to the business and refers friends and family can be worth more than a customer who doesn’t. Additionally, customer segmentation can be a useful tool for understanding how different customer groups contribute to the overall CLV.

Finally, founders should consider the cost of acquiring and retaining customers when measuring CLV. This is done by taking into account the resources spent on acquiring new customers and retaining existing ones. Once these costs are accounted for, the CLV can be adjusted to give a more realistic view of how customers are contributing to the business.

Optimizing CAC vs CLV

So, how can founders optimize CAC vs CLV? First, it’s important to understand the relationship between CAC and CLV. If CAC is greater than CLV, then the business is losing money on each customer it acquires. On the other hand, if CAC is lower than CLV, then the business is making money on each customer. The goal, then, is to ensure that CAC is lower than CLV. At the very beginning of your business journey, your customer lifetime will obviously be low, so the key to short-term success is to gain an understanding of the industry CLV averages but then focus on and ensure and continually optimize for a low CAC.

Reducing CAC

To do this, founders must focus on reducing CAC while increasing CLV. To reduce CAC, founders can focus on optimizing their customer acquisition channels. They can experiment with different channels to find the ones that drive the most cost-effective customers. They can also focus on improving their targeting to ensure they’re only reaching the most relevant and likely-to-convert customers.

Increasing CLV

To increase CLV, founders can focus on improving the customer experience. This could include improving the product, simplifying the onboarding process, increasing customer engagement, and offering incentives to encourage customers to come back.

By focusing on both reducing CAC and increasing CLV, founders can optimize the relationship between the two.

Examples

To illustrate, let’s look at an example. Let’s say a business spends $100 to acquire a customer and the customer brings in $150 over their lifetime. In this case, the business is making a profit of $50 for each customer. If the business can reduce CAC to $80 and increase CLV to $200, then the business is now making a profit of $120 for each customer.

By optimizing CAC vs CLV, founders can maximize the return on their customer acquisition efforts. By understanding the relationship between the two and focusing on reducing CAC and increasing CLV, founders can ensure that they’re making a profit on each customer they acquire.

Benchmarking your CAC and CLV figures against industry averages is a smart way to understand if your results are moving in the right direction. There are a number of annual reports that come to market showing new and updated averages such as below:

• According to the 2019 State of SaaS Benchmark Survey from Price Intelligently, the average Customer Acquisition Cost (CAC) for SaaS companies is $3.51. 
• According to the 2019 State of Startups report from First Round, the average CAC for B2B startups is $3.82. 
• According to the 2017 State of Digital Marketing report from Econsultancy, the average CAC for B2B companies is $21.
• According to the 2017 State of the CMO report from Deloitte, the average CAC for consumer-oriented companies is $29. 
• According to the 2016 State of Inbound report from HubSpot, the average CAC for B2B companies is $55.

This article is a part of a new series - Tips for Founders.

This series will include general hints and tips for founders going through the grind of starting their businesses, including ideation all the way through to product market fit, scaling and capital.

Follow for updates: Sam Johnston

Sign up for the Founders Tips free newsletter: https://www.linkedin.com/newsletters/tips-for-founders-series-7004556291364855809/

#leadership #data #business #digital #growth #scalingup #scaleups #growthhacking #entrepreneurtips #businessadvice #leadership #ceoinsights #ceotips #ceolife #ceomindset #ceoleadership #ceocoach #founder #founderstories #founderjourney #founders #incubator #accelerator #venture #venturestudio #incubator #nthventure #investment #investor #vc #angel #capital #investmenttips #investmentstrategies #startup #market #recession #CAC #CLV