How many of you know the average lifetime or annual value of a client?
I thought I would continue on with something I talked some about yesterday. Customer Acquisition Cost (CAC) and Lifetime Value (LTV).
- Some definitions
- CAC – the cost to get new customers/projects – Total Sales/Marketing Spend divided by # of clients obtained
- Customer Retention Costs – Additional costs associated with keeping a customer – sometimes associated with project spends for hospitality, etc.
- LTV – the gross revenue the each client / project brings in on average – Total Project Revenue – Cost of Goods
- Know the numbers to be successful
- To be successful you must know your numbers and keep on top of them – you need to have some Key Metrics for your sales and marketing efforts – you can use something different than CAC and LTV but have something.
- CAC and LTV can help signify profitability – calculate LTV/CAC and compare to Total Overhead Cost/Sales and Marketing Cost – LTV/CAC must be higher to generate profits
- Handyman wants to improve sales – hires a sales rep and increases his advertising
- Total sales and marketing = $100,000
- New clients = 100 annually
- CAC = $1,000
- Average project = $2,000 / COG = $800 / LTV = $2,000 – $800 or $1,200
- End of the year he makes $20,000 or $200 x 100 clients/projects
- Use these numbers
- We need Key Metrics to improve our business
- Use these numbers to help set your goals and trajectories
- Test things and see if they work
- If you want to track something different that is Okay – key the thing is to have a metric and track it
What is the value of your clients / projects?
How can you improve that number?
What is your CAC?
How can you improve it?
Calculate your CAC and LTV
Improve and track these key metrics or something similar