Beautiful balance of CAC, CPRO and LTV
Cost financials for growth 101
So, how would you calculate a CAC?
I remember asking this question a couple of years ago, when interviewing candidates for a position as digital marketing manager.
Surprisingly, no one could answer. Marketers tend to think in CVR%, ROAS, ROI, AOV — which is only a part of the story.
If you’re not selling something that customers buy only once in their lifetime, which is rare — there’s a notion of LTV.
The aim of the business is to maximize LTV by bringing in frequent orders, while keeping the cost of each order to a minimum. Easy peasy.
Now, how much should companies spend as CAC?
For growing companies, generally CAC(customer acquisition cost) is close to the 12 month margin-based LTV. This means, you’re willing to pay for acquisitions which will pay itself in 12 months, and any marketing done to increase LTV will lead to profits after the first 12 months.
Quite simple, no?
Now, to add another layer of customer tiers.
In reality there are many CACs and LTVs, as generally customers can & should be tier-ed (Bronze, Silver, Gold, Platinum, VIP, etc).
For high paying LTV customers, let’s say people who would spend 100 dollars you’d want to pay more to acquire their orders, while for one-off customers who spend 5 dollars, you’d rather not spend too much to acquire— maybe show them some advertisements while you’re at it.
Also, for ecommerce businesses there is always a notion of attribution, the question of which channel or effort do we accredit this certain acquisition.
This is equivalent to: how do we want teams to acquire customers/ optimize towards so that the business grows without inefficient spending.
Often times the pitfall of looking at ecommerce data in Google Analytics is believing what you see in the default Conversion reports — it’s geared to allocate more conversions to paid marketing, and it’s called “Last-Click Non-Direct”.
Essentially, taking your direct channel conversions and allocating back to the previous channel that user touched — you can see why Google provided Google Analytics for free when they started to launch(maybe that is for another post)
Getting back to CAC — in general, US CAC is relatively high, compared to other parts of the world. So, for non-US companies taking on US market, they have to be prepared to improve LTV in a highly-competitive market, by x2 fold or x3 fold.
This seems obvious but for some companies they do not seem to understand this dynamic.
What about repeats?
As for CPRO(cost per repeat order), most companies are spending too much paid marketing for customers who may have purchased anyway through direct / SEO.
The reason why a lot of hotels and airlines invest in loyalty programs is to spend less in paid marketing and more in additional services / added benefits, whilst improving LTV. Better to upgrade your room than for the company to pay for ads when you’re looking to reserve anyway, right on.
Loyalty affiliates— always separate out new acquisition and repeats, for they should have much different value.
Unveiling perf of dynamic retargeting
A company I recently served had issues with user growth even with increased paid marketing— they wanted to grow but overall didn’t know how to spend — this is an attribution issue.
The company was allocating too much outcomes to paid marketing — namely dynamic retargeting, and they thought they were acquiring new, incremental customers. After a proper attribution model was set up, it was clear that the company would spend 50% less in dynamic retargeting and have no negative impact.
This can be visualized with proper attribution modeling, details here. (Multi-Channel Attribution Modeling: The Good, Bad and Ugly Models by Avinash Kaushik).
Most teams understand the essence of CAC LTV, CPRO but often times have trouble implementing into their day-to-day. Marketing teams without this balance of CAC, LTV, CPRO & the proper attribution, are drinking their own Kool-aid.
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