Getting new leads and turning them into conversions requires a marketing investment. You’re glad when those leads turn into customers. But sometimes the cost of converting those leads outweighs their value.
That’s why you need to monitor your Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio so you’re not overpaying for customer acquisition. This ratio will help you lower your marketing costs and increase your revenue.
Read on to find answers to pressing questions such as:
- What do LTV and CAC mean?
- Why should you look at LTV/CAC?
- What is the LTV/CAC formula?
- What is a positive LTV/CAC ratio?
- How to improve your LTV/CAC ratio?
What do LTV and CAC mean?
Lifetime value (LTV) is the value of a customer throughout their relationship with your company. This metric predicts how much a given customer is worth based on how long they will work with or purchase from your company.
The cost of acquiring customers is referred to as the Customer Acquisition Cost (CAC). This includes marketing, sales, and other costs.
Why should you look at LTV and CAC?
You may be wondering why you should track LTV and CAC together. LTV and CAC can help you determine if your customer acquisition costs are profitable.
The LTV/CAC ratio shows whether you are overspending on customer acquisition.
For example, you might spend $1,500 on marketing to a potential customer. When he converts, his LTV is $750. This means that attracting customers will not cover marketing expenses.
You can modify your marketing strategy based on your LTV/CAC ratio.
What is the LTV/CAC formula?
Now that you understand the meaning of LTV/CAC ratios, it’s time to calculate your own to see if it’s right for you. To determine the ratio, use the following LTV CAC formula:
LTV/CAC Ratio = Lifetime Value/Customer Acquisition Cost
To calculate your LTV CAC benchmark, simply divide your lifetime value by your customer acquisition cost. For instance, if your lifetime value is $1500 and your CAC is $500, your value to cost ratio is 3:1.
What is a positive LTV/CAC?
A 3:1 LTV/CAC benchmark. This ratio is good because it implies that you are spending enough money on marketing to get customers who always give you value.
If your ratio is less than the LTV/CAC standard, for example, 1:1, you are losing money. That means your marketing spend is high and your lifetime value is low.
A 3:1 or 4:1 ratio is great. This LTV/CAC benchmark implies that your marketing and customer value are balanced.
If the LTV/CAC ratio is 5:1, that means you’re not spending enough on marketing. “Doesn’t that mean I’m getting high-value customers without spending a lot on marketing?” you ask.
To some extent, yes. But that metric also means you’re losing the opportunity to bring in customers more quickly. It means that to keep up with the expansion, your sales and marketing departments may be struggling.
An LTV/CAC ratio of 3:1 is ideal for achieving harmony between CAC and LTV.
How to improve your LTV/CAC ratio?
There are actions you can take to improve your ratio if you have utilized the LTV/CAC calculation and find it unsatisfactory. Let’s look at some approaches to improving your current strategies if your LTV to CAC ratio is not good:
LTV/CAC ratio less than 3:1
If your ratio is less than 3:1, look at your marketing spend. If your LTV to CAC ratio is low, your marketing budget may need to be adjusted or reduced.
Some cost-effective tactics include:
- Pay-per-click (PPC) ads. They are shown at the top of search results. You set a budget and only pay when people click on your ad. PPC is an excellent way to control your marketing budget.
- Social media advertising. Social media ads appear in consumers’ news feeds when they browse social media. With social advertising, you set your budget and daily limits, so you don’t spend it all in one day. It’s a good way to attract more consumers.
- Content marketing. Content marketing involves educating your audience through blogs, guides, and videos. This method saves money by creating content that stays relevant and increases the number of visitors to your site.
These tactics are great options if your current marketing isn’t working.
LTV/CAC ratio more than 4:1.
If your LTV/CAC ratio is grater than 4:1, it’s time to engage marketing channels that will help you bring in consumers faster and help your sales team keep up with demand.
Here are some great marketing tips:
- Search engine optimization (SEO). It is the process of increasing your website’s ranking in search results. When people search for information, products, or services, this method helps them find you. It helps you reach out to people at the right time to increase purchases.
- Email marketing. It involves sending relevant emails directly to consumers’ inboxes. Email is a great way to quickly engage potential customers by sending them relevant promotional offers;
- It is a strategy that involves marketing to people who showed interest in your company. This strategy reminds people who might be interested in your product or service of their interest and encourages them to come back and make a conversion.
These marketing strategies are useful if you want a great LTV to CAC ratio.
The LTV to CAC ratio is very important if you want to spend your marketing investment effectively. Because marketing is such an important part of online business, you must keep your LTV to CAC ratio under check.
Seologic can help you rework your marketing to improve your LTV/CAC ratio. With more than 12+ years of experience in digital marketing, we know how to create marketing campaigns that work.
Contact us online or call +13478979960 to speak with a strategist about our digital marketing services!
