The chief financial officer is concerned about the company's dismal profit and loss statement. While marketing and sales have met their key performance indicators of acquiring new leads and customers, they have been spending huge amounts to do so without generating sufficient revenue from the new customers. The CFO calculates that the average lifetime value of a customer is $90 based on how long they typically stay, number of purchases, and average profit margin. However, the average customer acquisition cost is $100, meaning the company is losing $10 for every new customer. The document outlines the importance of calculating lifetime value and ensuring customer acquisition costs do not exceed one third of lifetime value to avoid endangering the business.

1. K I L L T H E B U S I N E S S
T H R O U G H C U S T O M E R
A C Q U I S I T I O N
When does Marketing Get Dangerous?
Amir Jabbari

2. Chaos at C-Suite Meeting
In a C-Suite meeting, everyone is talking at the same time.
Everyone seems to have their own concern. The chief product
officer is concerned with the amount of traffic the product is
receiving, she says that the current infrastructure cannot
support the amount of traffic the product is getting. The Chief
sales officer says that he needs to increase the headcount in
the sales office, because the current team cannot handle the
amount of leads that is being generated on a daily basis.
The CFO, however, interrupts everyone in an angry manner...
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3. Amir Jabbari

4. The chief financial officer, has recently prepared the P&L
statement and it looks dismal.
Marketing and Sales are spending huge amounts of money to
acquire new customers, but they cannot generate sufficient
revenue from the new acquisitions.
The CEO has set the KPIs for marketing and sales team, and it
was new leads and new customers respectively.
Both teams have meet their KPIs, and now it's time to
celebrate. but what is the issue with the P&L statement, should
they wait some time before they generate profits, but
according to the CFO, if they continue this way, they will be out
of business soon.
CFO's Concern
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5. So what is the problem?
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6. Not All Customers are Equal
It is a fact known to anyone, that acquiring new customers is
good. It is the cornerstone of business and marketing.
Most of the companies, especially those at their early stages,
evaluate their success based on the number of new
customers generated.
But it is not a good practice to acquire customers at any cost.
Some customers are worth more for the business and some
are worth less or even worthless and should be avoided.
The marketing and sales department should take this into
consideration and not go after just any customer.
So make sure that you calculate the worth of your average
customer.
But how is it done?
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7. LTV
A metric that is of outmost importance when it comes to
evaluating customers worth is LTV. It stands for Life Time
Value and it is calculated as follows:
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LTV=
Average number of years a customer stays with you
*
Average number of transactions a customer makes each year
*
Average profit margin for each transaction

8. Calculating LTV
The company that we talked about is in the insurance industry
The marketing manager seeks help from the data team and
gets the following data:
On average, new customers stay for 3 years with the business,
and they buy 3 insurance packages each year. The average
profit margin for the company is 10$.
Based on the acquired data, the marketing manager starts to
calculate the LTV for their average customers.
LTV=
3 (Number of years they stay with the business)
*3 (the average number of packages they buy each year)
* 10 (the average profit margin from every transaction)
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90$

9. The Problem is Now Clear
So any new customer that is being generated for this business
is worht 90$ at most. But the average spending amount for
each customer is now 100$. It means that by acquiring any
new customer, the company is losing 10$, and it is now clear
why the P&L statement looks so dismal.
As a rule of thumb, the CAC which stands for customer
acquisition cost should be a third of LTV, and it means that the
marketing team needs to optimize their efforts, so that for
acquiring any new customer they spend 30$.
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10. Further Considerations Regarding LTV
There are some considerations that need to be paid attention
to regarding LTV:
1- Money generated tomorrow is worth less than money
generated today, so you need to seek assistance from your
finance manager to help you in calculating the NPV or net
present value of your earnings from each customer.
2- Some segments have more LTV than others, so you cannot
stick to a CAC for all your new customers. It is advisable to
calculate the CAC for each of your major customer segments
and optimize your CAC accordingly.
3- You can always increase your customers' LTV by focusing
on relationship marketing activities and improving your CRM
and CXM activities.
4- Another term for LTV is CLV, so you may stumble upon this
term in other texts.
5- Through customer advocacy plans, you not only decrease
your CAC, but also increase the LTV, because customers who
are referred to your business by peers, are apt to stay longer
with you.
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11. For more documents, scan the code
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K I L L T H E B U S I N E S S
T H R O U G H C U S T O M E R
A C Q U I S I T I O N
When does marketing get dangerous?