Customer Acquisition Cost and Customer Lifetime Value: The Two Essential Metrics for Profitable Digital Marketing

In this post, we're looking at why customer acquisition cost and customer lifetime value are some of the most important metrics for your business.

When approaching digital marketing for the first time, there are many terms and concepts we should familiarise ourselves with. Marketers sometimes seem to purposefully develop complex terminology to make it look like what we’re doing is far more difficult than it actually is.

Digital marketing’s strength relies on a foundational philosophy which can be summarised with “You can’t manage what you can’t measure”. 

This is, of course, true, but at times acronyms and an excessive data focus can distract you from doing what a marketer should be doing best: finding ways of understanding your customer and empathizing with his\her life situation. 

Only by understanding customer behavior and values can we develop useful and meaningful products and services which will be attuned to what our customer is looking to find in the market. 

In this post, we want to focus only on the most relevant digital marketing metrics, so that once you have covered the basics, you can invest the rest of your time in connecting to your audience. 

This is why we’re going to discuss customer acquisition cost and customer lifetime value. 

If you understand these two elements of your marketing campaign you will have understood 80% of what really matters. 

With no further ado, let’s delve right into it. 

What is Customer Acquisition Cost (CAC)

Customer acquisition cost refers to all of the costs that your business will sustain in order to acquire a new customer. 

For as simple as this definition might seem there are a variety of elements that concur in your customer acquisition cost 

In the calculation of our customer acquisition cost, we could consider for instance: your advertising costs, the costs of your marketing team, the cost of your sales team, the costs connected to the development of creative materials, the technical costs connected to running the campaigns or managing the digital infrastructure, the publishing costs associated with your content, your content production costs and your inventory upkeep.

It is unlikely that you will incur all of these costs, but most of them are common in any business. 

Now if we were to consider this list simply a list of costs, we would see marketing as a huge money drain. Running a fully-fledged marketing campaign is certainly expensive.

In actual facts that would not be far from the truth, unless we were to consider our next metric: customer lifetime value, which we’ll address in the next section of our post.

What is Customer Lifetime Value (CLV)

We could define customer lifetime value as the total worth to your business of a customer over the entire span of time of their relationship with your brand.

If we are to develop a product or a service that we can only sell once, then our marketing efforts will be very expensive. This is because each time we’ll get someone to buy from us, we won’t be expecting much of a return. 

In business, we often say that retaining a customer is much cheaper than acquiring a new one. 

Well, customer lifetime value does provide confirmation of this concept, as you need to increase your average customer lifetime value to make your marketing worthwhile. 

In this sense, retaining existing customers by increasing their lifetime value can be an excellent way to drive growth, by retaining a better profit out of all your successful marketing campaigns. 

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How to Manage CAC and CLV to Make Your Campaigns Profitable

As discussed in the previous section we need to make sure that we’re managing these two variables strategically to create strong retention and to lower our customer acquisition cost. 

Some of the most effective approaches to exploiting the dynamics between these two variables involve:

Using Loss Leaders

A loss leader is a pricing strategy whereby a product is sold below market pricing to encourage sales. As customers buy this product feeling as they’ve saved money they are likely to spend the rest of their budget (or more) on other products. 

A loss leader tries to sacrifice a little bit of the profitability of the first transaction while making money on the other subsequent purchases. 

Product Synergies

When products include multiple product components (a razor and a razor blade, a printer and ink cartridge, a coffee machine and coffee pods, etc) a company can decide to sell the more committing product at a lower price, (for instance the printer) knowing that it will be possible to draw more profits from the supporting product (the ink cartridge) that can be priced more expensively as the consumer will not actually have much of a choice when it comes to purchasing them.  Moreover, the supporting product will be depletable, hence increasing the customer’s lifetime value.

By taking advantage of these overlaps between the customer acquisition cost and customer lifetime value, a brand can move beyond the common perception of seeing marketing as a cost, but actually switching to seeing marketing as an investment, where the more you spend the more you earn.

Great, now that we’ve covered all relevant bases, let’s move towards our conclusive remarks.

Conclusions

There you have it! In this post, we’ve discussed two very important metrics to make your marketing much more uncomplicated. 

As we navigate digital marketing strategies it is essential to focus on our customer acquisition cost and our customer lifetime value as these metrics are able to encapsulate the essence of a profitable go-to-market plan. 

If you’re looking for investors, be advised that your customer acquisition cost and customer lifetime value are likely to be one of the most important metrics that you’ll be discussing, as they will provide an indication of your business’s ability to scale, if you were to be given sufficient funding.

In this sense, it may be a good idea to refrain from connecting with possible investors until your metrics are in order. To some extent, it is quite true that we get to make good impressions only once. 
If you’re interested in exploring digital marketing further, we encourage you to visit our blog where you can find a wealth of resources on entrepreneurial marketing.

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Customer Acquisition Cost and Customer Lifetime Value: The Two Essential Metrics for Profitable Digital Marketing In this post, we're looking at why customer acquisition cost and customer lifetime value are some of the most important metrics for your business.
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