What are CAC and CLV for Business Growth?

Written by
Zachary Pestana
Last Modified on
December 19, 2023

Understanding Customer Acquisition Cost (CAC)

CAC, which stands for Customer Acquisition Cost, represents what it will take for your business to acquire a new customer. This is an extremely important and valuable business metric as it essentially breaks down the financial costs of huge acquisition campaigns and makes an assessment based on each and every customer. At the very core, the customer acquisition cost is answering the question: “How much does every customer cost the business?”.

Why is important to know CAC?

Your business may be attracting several new customers, giving an illusion of growth and success. However, is the amount spent in acquiring these customers is bigger than the cost of getting them? If the answer is no, the company might actually be losing money although it looks and appears to be expanding.

How to calculate CAC?

The CAC for any given period refers to the total amount of all promotional and marketing costs divided by the number of new customers acquired.

The formula is: CAC = Total Promotional Costs / Number of New Customers

The promotional cost of your business will include everything required to acquire the new customer, such as the cost of an ad and the labor needed to create it. To make the most of your promotional and marketing budget, the Aspire Business Account can be a great option. It is an all-in-one business account that allows you to earn attractive cashbacks on your online marketing spend with no strings attached and no hidden fees.

Understanding Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV) makes use of a combination of purchase frequency and average order value (AOV) to estimate the total value of an average customer to the company throughout the entire time they remain a customer. The best thing about customer lifetime value is that it gives an insight into the total inflow of sales each customer is expected to offer to your business. In essence, CLV answers the question: “what is the worth of each customer to my brand?”

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Why is it important to know CLV?

CLV is a very important metric as it gives you a customer-centric perspective to better analyze the sales and marketing strategies of the business, such as retention, acquisition, upselling, cross-selling, and support.

It can be very useful in helping you better understand the behavior of your target customers and determine how much to spend on acquisition. You may not know the amount you should spend on acquiring customers if you do not know how much you can earn from each of them.

Measuring CLV

There are two basic formulas to calculate CLV:

  • CLV = Average Revenue Per User X Gross Margin X Average Customer Contract Duration

  • CLV = Average Revenue Per User / Churn Rate (%)

CAC and CLV for Business Growth

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Customer acquisition cost and customer lifetime value offers insights into the cost of acquiring a customer and how much it is worth. If the goal of your business is to expand, grow, and increase sales and profits, CAC and CLV are great indicators of whether you are succeeding and let you know where you should focus your efforts. Ultimately, the sustainable success of a company is determined by how effective the business is in acquiring and retaining customers.

A CAC that is higher than normal sends a signal for you to focus more efforts on improving the strategies used by your brand to attract new customers, as well as ways to increase conversions.

How to Optimize CAC?

1. Enhance user value

User value refers to the ability to create something attractive and pleasing to the customers. This could be adding feature enhancements that users have expressed desire for or implementing something new to enhance the existing product for better positioning. You may slowly realize that the level of customer satisfaction has a positive correlation with customer retention rate.

2. Improve on-site conversion metrics

Some effective ways of enhancing the site performance in general include experimenting with different checkout systems to decrease shopping cart abandonment rate, improving the site speed and landing page, as well as optimizing the site for mobile devices.

3. Create customer relationship management (CRM)

Almost all successful brands with loyal and repeat customers will have in place some sort of CRM. It could be having automated email lists, loyalty programs, blogs, or other methods of capturing customer loyalty.

How to Optimize CLV?

1. Add a personal touch

An intuitive user interface and personalization will be useful in helping you deliver an exceptional customer experience. Understanding your customers will also be valuable when you want to cross-sell or upsell. Simple things like having personalized in-app messages can really go a long way in allowing the customer to feel valued and hence increasing the customer lifetime value.

2. Add sticky features

Add new features in your product or service that will make it harder for your customers to leave. For instance, a personalized dashboard that the user can develop with the data and information they have to enhance the overall efficiency of the business. Something along the lines of this feature will enhance the customer’s quality of life, making them more reliant on your product and therefore drive long-term growth. This will in turn inspire customer loyalty and increase the average lifespan of customers.  

3. Reassess your unique value proposition

To understand your brand’s loyal customers on a deeper level, it is important to keep up with them. Whether it is frequently reassessing your unique value proposition to check if the product still matches the evolving needs of the customers, tweaking your pricing and packaging, or consider bundling certain features, it will be more successful if you truly understand your customers.  

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About the author
Zachary Pestana
is a seasoned writer in market trends and business thought leadership. With a writing history at Incorp Global, MOQdigital, and AIESEC Australia, Zachary leverages his broad range of experiences to stimulate industry conversations and engage audiences.
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