How to Use Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV)

Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV) are two of the most basic metrics a business can track as it relates to customer revenue. That being said, I’m continually surprised by how many companies do not explicitly use these labels as well as how many use the labels, but don’t do anything with the data.

In this article, we’ll introduce CAC and CLV. There’s a chance your organization may not highlight these values; however, I can near guarantee you they have the data readily available. Afterwards, we’ll go over some basic ways to operationalize CAC and CLV.

What are CAC and CLV?

We’ll quickly go over what each of these values are and how they are calculated.

Customer Acquisition Cost (CAC)

CAC is a pretty simple concept. For a given period of time, take the dollars put into acquiring new customers and divide by the number of customers acquired. What counts as a cost for acquiring new customers? Generally that’s the cost of your sales and marketing teams including compensation, tools, and services.

Customer Lifetime Value (CLV)

CLV is an equally simple concept. How much money has a customer given you? That’s their CLV. It’s almost a guarantee this number for any given customer is readily available; however, just like CAC is a “per customer” calculation, we’re going to apply the same framing for CLV.

Over a given time period, two things happen: customers come and customers go. We need to account for both. In simplest terms, we’re going to take the average revenue per user (ARPU) and divide by the churn rate.

How to Use CAC and CLV

So now we know that CAC tells us how much it costs to get a customer, and CLV tells us how much we should expect from any given customer. Here are four simple ways to operationalize these two calculations.

1. Make sure CLV is higher than CAC. This should be fairly obvious, but if you spend more money acquiring a customer than you expect a customer to give you over their lifetime, that’s a net loss.
2. Trends over time. Monitor your CAC and CLV calculations over time and aim to explain changes. Are they improving year-to-year? Did a new marketing strategy reduce your CAC? Did changes to customer support increase CLV?
3. Calculate breakeven. Let’s say you’ve calculated your CAC to be $100 and CLV is $500 with an average lifetime of 18 months. We can determine how long it will take to break even for a newly acquired customer. Using the above numbers, we’re accruing ~$27 a month of customer value. Given a CAC of $100, this means we’ll break even just shy of four months. Consider this your critical period because you’re still “in the red” as it pertains to a new customer.
4. Calculate per segment. However your company segments customers, calculate CAC and CLV for each segment. This can help reduce the volatility of the calculations and assist in identifying trends. If you need ideas for segmentation strategies, here’s an article I wrote on the topic.

Conclusion

To close, this is an introduction to CAC and CLV, but there are levels of maturity in terms of defining and conceptualizing each value. Use these definitions as a starting point, but be prepared to adapt the calculations to better fit your business. Just make sure you’re documenting WHY the calculations are as such and be ready to continuously adapt.

How have you used CAC/CLV and adapted the calculations at your organization? What are your data-driven CAC/CLV success stories? For more articles focused on Customer Success, visit the Growth 85 homepage.