CLV:CAC ratio

How To Justify Your Customer Acquisition Cost

Does your CEO jump when you mention your Customer Acquisition Cost?

Many growth marketers who have been growing their eCommerce business for a while probably have a couple of metrics engrained in their minds – and an acceptable cost associated to those metrics. As a growth marketer it is easy to get hung up on top-of-funnel metrics like generating a monthly lead count, cost per lead, cost of acquisition and calling it a day – hey even hitting those numbers can be hard enough! 

In my experience, we all have perceptions of a pretty decent cost per lead (CPL) and customer acquisition cost (CAC) – and the threshold that makes the VPs and C-Suite jump out of their seat. So it can be tempting to just target that average CPL of $35 and average CAC of $82 and hit your top-of-funnel targets for the month. No sweat when you submit your monthly marketing report.

Change your perception of performance

What if your most valuable customers cost a little bit more to acquire than the target cost per acquisition goal you have adopted? It can be nerve-wracking presenting higher CPL and CAC numbers when your stakeholders are trained to think that spending ad dollars efficiently means lower CPL and CAC, when in reality you can still be throwing all of your budget out the window acquiring a high volume of high-churn customers. When you compare your average CAC to your average customer lifetime value (CLV) you can determine if you’re spending too much acquiring new customers or subscribers. To calculate CAC, divide your ad spend by new customers acquired for a given time period. Calculating the average customer lifetime value requires knowing your all-time net revenue per customer / total customers for a given time period.

Once you have your average CAC and your average CLV you can see how your marketing investment is paying off at a bird’s-eye view through the CLV:CAC ratio.The ideal CLV:CAC ratio is 3:1, meaning your customers’ value is three times more than the cost of acquiring them. If your CLV:CAC ratio is 1:1, you are paying an equal amount to acquire the customer to the customer value. If your CLV:CAC ratio is 4:1 or higher this can indicate opportunity to invest more in marketing.

A lot of eCommerce merchants using Shopify will navigate to the Returning customers report and take the Total Spent To Date for their customers for an annual time period and divide that number by the year’s total customer number. If you are only trying to take a peek at how you’re doing and are just starting to report on CLV – this approach is fine for a gut check.

Scale optimization

Averages are a good way to start understanding your overall marketing impact, but you won’t have any actionable takeaways unless you are able filter your CLV:CAC data down to at least the source level. If you have ever attempted pulling CLV:CAC by source without an analytics platform like Sublytics, then you know this requires a lot of manual exports from various ad-tech platforms and your store / billing system. Let’s hope you like VLOOKUPs. The point being, CLV alone is not an easy number to pull manually and most analytics platforms don’t consider the complexities of subscription billing to pull an accurate customer lifetime value for your recurring business model.

Sublytics is the right solution when you are ready to start optimizing campaigns for CLV:CAC ratio in real-time. With direct integrations into Facebook, Google Ads, and custom integrations into affiliate networks – Sublytics allows subscription eCommerce merchants to filter CAC, CLV, and CLV:CAC Ratio down to the utm source, medium, campaign, content, term, ad id, and more. No more celebrating the below target CAC. Focus on making the right investment acquiring subscribers with the longest lifespan and highest revenue value. 

To learn more about how Sublytics can change the way you manage your subscription acquisition programs get in touch with us today and get set up with a free 30-day trial of our analytics platform! 

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