Analyzing Customer Lifetime Value & Customer Acquisition Cost
Whenever planning a marketing strategy for your business one thing that always comes to your mind is what should be the cost of marketing our product so that we earn from it and we get a lot of customers. It is essential to get a return from your marketing otherwise it is going to be a liability for your business.
Customer Lifetime Value & Customer Acquisition Cost is the answer to these marketing-related problems and how to better optimize your strategy. Many businesses are associated with Shopify and they can use various features like Shopify store revenue checker, Shopify profit calculator app, Shopify cogs app which can help them even if they don’t know any technical calculations and formulas.
Customer Lifetime Value
Customer Lifetime Value is also known as CLV or Lifetime Value (LTV). It is found out by calculating and applying some formula which is going to be explained below. Customer Lifetime Value is the total profit that is gained after deducting the cost of goods sold, shipping. All the marketing expenses are not deducted here as they are variable and may change timely.
If you will add marketing value it will affect your analysis. This is the profit that the business got from its customers. There are several ways to calculate Customer Lifetime Value. This calculation may vary from business to business. We are showing the easiest way to calculate. Except that there is another profit tracking app that can help to ease the calculation
• Calculate Customer value
Customer value = Average order profit * Purchase Frequency for a given time
Average order profit excludes marketing expense but includes the cost of goods sold, taxes, refund, and shipping cost.
Customer value is customer value over time spam.
• Average order Revenue = Revenue generated/ No of orders in that time period.
• Average Net Profit Margin = (Revenue- expenses, except marketing)/ revenue in that time period.
• Purchase frequency = Total no of orders/ Total number of customers in that time period.
• Customer Lifetime Value = Customer value * Average customer duration.
Average Customer Duration
It is the time that is expected by you to gain a customer, the duration is in years. The duration of the customer may differ according to the product, type of store, level of customer satisfaction, and in years how much the customer prefers your brand.
Customer Acquisition Cost
Customer acquisition cost is also known as CAC. As the name suggests t is the cost that is generated to acquire a customer. There are the following points on which this cost is calculated.
• Advertising campaigns on social media as well as print media like Facebook, Instagram, Google Ads, and Magazine.
• Salaries of marketing employees
• Designing cost of the advertisement
• Software cost used for marketing the Ad
Making use of Customer Lifetime Value & Customer Acquisition Cost Together
Customer Lifetime value gives an average duration of earning through customers without any marketing expense, while Customer acquisition cost tells us what the cost of acquiring that customer is. If we combine both of these calculations into metrics we can acquire data to know how much spending on marketing can help to gain profit and acquire customers at the same time.
• Metric = Customer Lifetime value: Customer acquisition cost
• Payback = Customer acquisition cost / revenue per customer*Gross margin %
Calculation of Lifetime value: Customer acquisition cost ratio helps to get knowledge and analysis about your company’s growth. The ratio acts as a meter to determine you’re spending on your marketing, it will show that do you need to increase or decrease your spending. Is it worth your spending? It also helps to measure whether your marketing strategy is matching your organization's goals or not.
Calculation of Lifetime value: Customer acquisition cost ratio has advantages discussed above but one of the main advantages is predicting growth in the future. This prediction can easily change.
For better understanding let’s assume if a competitor who has the same products as you comes up with amazing marketing or a new company enters the market with more attractive marketing then your Lifetime Value will decrease.
But if you change your marketing strategy like changes in the way your product is displayed or more values to the environment, this can increase your Life Time Value. So you can’t depend on this ratio totally for your future growth as the market keeps changing and it is very uncertain.
Common problems of Customer Lifetime value
Customer Lifetime value is calculating total revenue without marketing expenditure or Gross margin of a customer in time duration but this can be a mistake. This calculation can cause Customer Lifetime value to multiply by its actual value rather than calculating the net revenue from customers.