Driving core customer marketing metrics (CAC & CLTV)

It’s no secret that companies ‌often incur costs to attract and convert customers. Advertising, marketing, promotions, etc. — they all add up, and they are a regular part of doing business.

But how do you know if the costs you paid to acquire a customer were actually worth the return on investment? To answer that question, you’ll need two pieces of data: Your customer acquisition cost (CAC) and your customer lifetime value (CLTV).

Understanding CAC and CLTV

Customer acquisition cost is exactly what it sounds like: the average cost associated with acquiring a new customer. It’s calculated by dividing your total sales and marketing expenses over a given period by the total number of new customers acquired during that same period.

Lifetime value, on the other hand, is a measure of the total revenue that an average customer will contribute to the business during their time as a customer (i.e., their lifecycle). Importantly, this extends beyond the initial transaction that first brought them to a business. It’s calculated by multiplying customer value (average purchase cost and frequency of purchases) by the average customer lifespan (how many years a customer remains active).

Measuring these two metrics together gives you insight into the total ROI you can expect from your sales- and marketing-related expenses, and they can help you understand whether or not certain expenses were justified.

Once you’ve begun measuring your CAC and CLV, you will form a baseline understanding of where your business is — and you can begin thinking about ways to optimize both metrics so that you’re getting the greatest return on investment at the lowest cost. This will typically involve lowering your CAC while boosting your CLV.

Key strategies for driving down CAC

Lowering your customer acquisition costs will, in most cases, involve incremental optimization of your existing processes. Below are three optimizations that can help you lower your CAC.

Improve targeting and segmentation

Targeting can make or break your marketing and advertising campaigns. Target too broad an audience, and you risk wasting campaign funds advertising to people other than your ideal customer — people with a low risk of converting. Target too narrow an audience, and you risk leaving potential customers out of the picture.

The key to improving your targeting is to have a clear sense of who your ideal customer is and what they care about. Information about their demographics, income, location, interests, and browsing history can all help you build a targeted campaign with the highest potential for getting in front of the right eyeballs.

Does your product or service potentially appeal to multiple audiences? Segmenting your customers into different groups can also help you better tailor your marketing efforts to improve conversions — for example, by presenting a different message to each segment that best aligns with their motivations.

This is where having the right tools, such as a Cloud Data Warehouse (CDW) and a Customer Data Platform (CDP), can help, thanks to a CDW’s ability to collect real-time, first-party data, and a CDP’s ability to use that data and create unified customer views. Really nailing your targeting and segmentation can help you reduce wasted funds, lowering your CAC.

Reevaluate marketing channels

Where you choose to deploy your marketing and advertising efforts will have a big impact on the cost of your campaign — and, as a result, your CAC. This is due to two main reasons:

• Costs vary by channel
• Some channels are more or less effective at reaching and converting your ideal customer

When deciding what channels you will target, it’s important to start with an understanding of where your customer spends their time online: What websites they visit and how often, what online communities they belong to, and what social media platforms they use. Once you have this information, you can build campaigns to get in front of them in those places.

But just because your customer spends time on a certain website or platform doesn’t necessarily mean that that’s the best place for you to spend your campaign funds. Some channels will simply be better suited for converting your customers, and other channels won’t be.

Given enough time and data, you can reevaluate the performance of these channels. Dropping channels that don’t convert well allows you to reallocate funds to better-performing channels, improving your cost efficiencies and lowering your CAC.

Automate processes where possible

While ad and marketing spend are an important part of your CAC, they’re not everything. Another important bucket to be aware of is the personnel costs related to actually executing the campaign, which can be significant. Luckily, there are ways that you can lower these costs as well.

One extremely effective way of controlling these costs is to automate tasks wherever and whenever possible — especially if those tasks are repetitive or low-value. Doing so frees up your staff to perform higher-value tasks. And of course, it can also lower the personnel costs associated with your campaigns.

What, exactly, you choose to automate will depend on the types of campaigns you are running and the tools you have at your disposal. That being said, it’s possible to automate large parts of the campaign process, including:

• A/B testing
• Email nurturing
• Social media marketing
• Advertising
• And more

Strategies for maximizing CLTV

Maximizing customer lifetime value boils down to one thing: Getting them to spend more money throughout their time as a customer. Below are some methods for doing just that.

Reduce customer acquisition friction

Friction is the enemy of conversion. Whether it’s during the initial customer acquisition process or subsequent transactions, reducing friction increases the chances that a customer is going to spend money with your business. The more they come back, the more transactions they complete, and the more they spend — the higher your CLTV and the easier it is to justify your customer acquisition costs.

The good news is that there are many opportunities to reduce friction or other roadblocks that might be preventing conversions. Some examples include:

• Offering multiple paths or channels to conversion (phone, email, direct sign-up, etc.) so that your customer can choose the path that appeals to them
• Eliminating unnecessary steps in the sales process that gets in between your customer making a purchase
• Offering free trials or a freemium model that lowers perceived risk that might otherwise prevent them from signing up
• Providing other incentives — such as promotions and referral awards — that provide value to the customer
• Providing excellent customer service right from the initial interaction to begin building trust and loyalty early in your engagement

Develop a strong customer onboarding experience

Once your customer has made their first purchase, it’s important that you do everything you can to help them realize value from it. Doing so increases the odds that they will come back to you for additional purchases or, in the case of subscription businesses, renew or upgrade their subscription in the future. It also makes them more likely to evangelize your product by referring other customers.

As mentioned above, you can do this by fostering a positive first impression during the initial conversion stage or during onboarding (where applicable). You might, for example, offer:

• Training on how to use the product or service
• Configuration or integration services
• A dedicated account rep that is available to answer any questions

Providing educational materials — such as how-to videos, step-by-step articles, FAQs, and guides — can also go far in helping your customers hit the ground running using your product or service.

Promote customer engagement and loyalty

The more engaged a customer is with your business, and with your product or service, the more loyal they are likely to be — and the less likely they are to potentially leave you for a competitor.

You can promote customer engagement and loyalty in several ways. Some effective strategies include:

• Regularly communicating with customers through email, social media, and other channels
• Implementing loyalty programs and reward programs to incentivize repeat purchases
• Creating a sense of community and belonging among your customer base

The longer a customer stays with your business, the greater the chances that they will make more purchases, boosting their CLTV.

Upsell and cross-sell to existing customers

Once you’ve gotten over the hurdle of the initial conversion, it should be much easier to convince a customer to make additional purchases — especially after they’ve started realizing value from your product or service. That’s why upselling and cross-selling to your existing customers is such an effective means of increasing CLTV.

Examples of upselling and cross-selling include:

• Offering product recommendations relevant to your customers, based on what you already know about them. This might be additional products or services that complement what they’ve already bought, or potentially those that address different (but related) needs
• Creating product bundles and package deals that help your customers save if they spend more
• Providing exclusive offers and discounts to loyal customers, especially if the customer has expressed cost as a concern or a reason they have considered moving to a competitor.

Measuring and optimizing CAC & CLTV

The strategies outlined above can help you optimize your customer acquisition costs and lifetime value. As a final note, here are other steps you can take to boost the overall effectiveness of your sales and marketing campaigns:

Track other key metrics: CAC and CLTV are, of course, important KPIs. But they’re far from the only ones you should care about. Return on ad spend (ROAS), customer churn rate, satisfaction score, and average order value all provide additional insights.

Let the data lead you: Leverage cloud data warehouses, CDPs, and A/B testing to glean insights and identify trends that you can use to personalize the customer experience and improve CLTV and CAC.

Continuously iterate: In your journey toward improving CAC and CLTV, there’s no guarantee that the steps you take will have the effect you expect. That’s why it’s so important to regularly benchmark your metrics — so you can look at the data and see what, if any, effect your efforts have. Continuously iterate as you work toward optimization.

Two sides of the same equation

While they measure different things, your customer acquisition costs and lifetime value both offer valuable insights into the overall effectiveness of your marketing and advertising efforts.

Optimizing campaigns with either metric in mind can help you boost ROI; optimizing campaigns with both metrics in mind can go far in turning your marketing team into a profit center for your business.

Improving CAC and CLTV requires a significant amount of customer data. On the CAC side of things, customer data makes it easier to adjust your targeting and segmentation, for example, or to reevaluate your marketing channels. On the CLTV side, customer data and insights make it easier to provide real value to your buyers and to upsell or cross-sell them other products they might enjoy.

A customer data platform (CDP) that integrates with your martech stack can help. These platforms aggregate data in real-time from all the sources so that you can see it all in one central location — empowering you to draw insights and turn them into action.

Interested in learning more about how a CDP can help you achieve your paid media goals? Request a free demo today.