As a SaaS business owner, you need to know how much you spend on acquiring new customers and the value they bring. You can do so by tracking and analyzing the two most crucial metrics. These are:
- Customer Lifetime Value
- Customer Acquisition Cost
Once you manage to track them, you have to compare them to check how much money your business is making from each customer. Balancing these two will help you understand whether you are generating profits or spending too much on bringing in new customers. Now, the main concern is how to do so. Don’t worry! We are here to assist you regarding this.
In this post, we will tell you how to calculate customer lifetime value and CAC. Moreover, we will also give you some effective strategies to find the perfect balance between these two metrics.
Understanding Customer Lifetime Value
It’s one of the most crucial yet complex metrics you need to track as a SaaS business owner. It tells you about the amount a customer will spend on your services or products throughout the relationship (lifetime). Let’s say you are selling your service for $100 monthly. A customer stays with you for a whole year. The LTV for that customer will be $1200.
The example above is for a single customer only. You cannot use the same approach to calculate the lifetime value of all customers. You need to track two additional metrics, average revenue per user and customer churn rate, to calculate customer lifetime value. The formula will be:
LTV = ARPU (average monthly recurring revenue per user) × Customer Lifetime
You can estimate it by using the churn rate as well. It can be more convenient as you can easily track the churn rate.
LTV = ARPU / User Churn
LTV and churn rate are inversely proportional to each other. If one is higher the other will be lower and vice versa.
Understanding Customer Acquisition Cost
As a business owner, you always want to bring in new customers. To do so, you need to spend on marketing, onboarding, and providing free trials. Apart from that, you have to bear sales expenses as well. All the amount you spend on acquiring a new customer is CAC. It tells you how much you are spending on expanding your customer base.
For instance, if your business spends $10,000 on marketing monthly and you acquire 100 new customers, the CAC will be $100.
5 Effective Strategies to Balance CAC and LTV
You need to balance these two metrics to understand the financial condition of your business. The following are some effective strategies you can adopt to balance them. Let’s go through them without further ado.
1. Optimize Marketing Spend
One of the best ways to reduce CAC is by optimizing your marketing efforts. You should focus on channels that bring in the highest quality customers at the lowest cost. You can do this by:
Using Data-driven Marketing: You can analyze customer data to find out which channels are helping you get most of your high-value customers. Based on this, you can spend more on those channels.
Targeting the Right Audience: You should always focus on marketing campaigns that reach potential customers.
Improving conversion rates: Optimizing landing pages and website user experience can also help regarding this. It will increase the percentage of visitors who turn into customers.
In short, you should try to reduce your marketing expenses without sacrificing the quality. It will reduce the CAC and increase profitability.
2. Improve Customer Retention
Retaining customers is more convenient and affordable than acquiring new ones. It also plays a crucial role in increasing LTV. When customers stay with your business longer, they bring in more revenue over time. You can improve retention by:
- Offering excellent customer service and addressing their concerns quickly and effectively. It will help you build trust and loyalty.
- Creating loyalty programs to encourage repeat purchases. You can offer rewards programs, discounts, or exclusive offers for returning customers.
Apart from that, you can also offer personalized customer experience and offer services tailored to their specific needs to retain them. By focusing on retaining customers, you increase their lifetime value. It helps in balancing a potentially high CAC.
3. Increase Average Order Value
It’s one of the most effective strategies to boost the customer’s lifetime value. By doing so, you can encourage customers to spend more on each purchase. The following are some best things you can do regarding this.
- Try to cross-sell and upsell products. You can recommend related products or premium subscriptions to increase the value of each sale.
- You can offer discounts on product bundles. It will encourage customers to buy more in one transaction.
- You can set a minimum purchase amount to get free shipping. It will encourage customers to add more items to their carts.
When customers spend more on your products or services, their lifetime value will increase. It will make it more convenient for you to balance customer acquisition costs.
4. Monitor Customer Behavior and Feedback
You should regularly track customer behavior and gather feedback to get valuable insights into how to improve both CAC and CLV. The most effective ways to do so are listed below.
Conduct Surveys: You can ask customers about what they like and dislike about your products or services. This can help you refine your services and improve your retention rate.
Analyze Purchasing Patterns: You should look for trends in customer purchases. It will help you understand what drives repeat business and develop your strategies accordingly.
5. Align CAC with LTV
You should aim to achieve a CLV to CAC ratio of 3 or more. If this ratio is less than 3, you’re spending a lot on acquiring new customers. And if it’s 1:1, you’re losing money on customer acquisition.
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Final Words
Now, you are all set to track and balance CAC and LTC. You can leverage Baremetrics to get help regarding this. It’s a trusted tool that will help you calculate customer lifetime value and CAC. Moreover, you can use it to analyze and compare them.
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