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How to Measure and Use Lifetime Value and Customer Acquisition Cost

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Presented at a Hubspot User Group Sept 2016. Focused on the LTV model, how to calculate and use LTV and CAC for budgeting, strategy development, and other marketing leadership. A great topic for in-house marketing leadership, as well as marketing/ad agency leaders.

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How to Measure and Use Lifetime Value and Customer Acquisition Cost

  1. 1. Measuring Marketing Value: Lifetime Value (LTV)
  2. 2. ME =
  3. 3. 4 Lifetime Value (LTV) Customer Acquisition Cost (CAC)
  4. 4. TODAY 5 THEORY PRACTICE
  5. 5. MY JOURNEY WITH LTV-CAC 6
  6. 6. CAVEATS 7  We want to be great marketers (growers)  How to lead, even when not in leadership  Data is important  Our context
  7. 7. HOW DO WE GROW? 8
  8. 8. HOW DO WE GROW? 9 GET NEW ONES KEEP CURRENT ONES 1 2
  9. 9. HOW DO WE GROW? 10 GET NEW ONES KEEP CURRENT ONES 1 2 LTV HELPS WITH BOTH
  10. 10. 11 5x-9x more costly to acquire new customer vs. retain existing
  11. 11. 12SOURCE: https://www.helpscout.net/75-customer-service-facts-quotes-statistics/
  12. 12. 13 It takes 12 positive interactions to make up for one unresolved negative experience = SOURCE: https://www.helpscout.net/75-customer-service-facts-quotes-statistics/
  13. 13. 14 9% 70% 91% of unhappy customers will not willingly do business with you again. Resolve a complaint in the customer's favor and they will do business with you again 70% of the time. START SOURCE: https://www.helpscout.net/75-customer-service-facts-quotes-statistics/
  14. 14. 15 Americans tell an average of 9 people about good experiences, and tell 16 people about poor experiences. vs. SOURCE: https://www.helpscout.net/75-customer-service-facts-quotes-statistics/
  15. 15. 16
  16. 16. 17 Lifetime Value (LTV) • What’s the value that this customer brings? • Long-term view of customers • “Average deal size” if one-time • How can companies with inexpensive products justify big marketing budgets?
  17. 17. https://blog.kissmetrics.com/how-to- calculate-lifetime-value/
  18. 18. SOURCE: https://blog.kissmetrics.com/how-to- calculate-lifetime-value/
  19. 19. 20 Lifetime Value (LTV) • Simple LTV = Total revenue from client • Traditional LTV = (Avg. gross margin) x (Customer retention rate / (1 + Discount rate - Customer retention rate)
  20. 20. 21 Lifetime Value (LTV) • Simple LTV = Total revenue from client • Traditional LTV = (Avg. gross margin) x (Customer retention rate / (1 + Discount rate - Customer retention rate) • Gross margin not revenue • Churn matters • “Bird in the hand is worth two in the bush”
  21. 21. 22 Customer Acquisition Cost (CAC) • (Sales + Marketing + hard costs) / number of deals acquired • Does *not* factor in overhead, delivery, support (operating expenses)
  22. 22. 23 The Magic Formula – LTV:CAC EXAMPLE LTV = $25,000 CAC = $6,000 LTV:CAC = 4.2
  23. 23. 24 The Magic Formula 3 : 1 healthy 5+ : 1 leaving $ on the table 1:1 spending too much Recover CAC in 12 months
  24. 24. WHAT NOW? 25
  25. 25. By: • product offering 1) Know Thy Magic Formula
  26. 26. By: • product offering • target market / vertical 1) Know Thy Magic Formula
  27. 27. By: • product offering • target market / vertical • acquisition channel 1) Know Thy Magic Formula
  28. 28. By: • product offering • target market / vertical • acquisition channel • sales person 1) Know Thy Magic Formula
  29. 29. By: • product offering • target market / vertical • acquisition channel • sales person • account manager 1) Know Thy Magic Formula
  30. 30. By: • product offering • target market / vertical • acquisition channel • sales person • account manager • marketing campaign 1) Know Thy Magic Formula
  31. 31. By: • product offering • target market / vertical • acquisition channel • sales person • account manager • marketing campaign • buyer persona 1) Know Thy Magic Formula
  32. 32.  Win the games you need to win  Focus on retention strategies  Thoughtful upsell 2) Increase LTV over time
  33. 33. + Channel + Strategic Partnerships + Expectation setting early + Online Self-service + Surprise and delight - Low Customer Satisfaction - High Churn Rates 2) Increase LTV over time
  34. 34.  Know how to decrease CAC  Get close to 5:1  Invest 3) Trampoline your ratio
  35. 35. 3) Trampoline your ratio  Know how to decrease CAC  Get close to 5:1  Invest 5:1 1:1
  36. 36. 3) Trampoline your ratio 5:1 1:1  Know how to decrease CAC  Get close to 5:1  Invest
  37. 37. 3) Trampoline your ratio 5:1 1:1  Know how to decrease CAC  Get close to 5:1  Invest
  38. 38. 4) Grow! THE CUBE MODEL GET NEW ONES1
  39. 39. 40 CAC LTV 1) Add more blocks with healthy unit economics
  40. 40. 1) Add more blocks with healthy unit economics 2) In a market with lots of blocks
  41. 41. 4) Combine CAC with sales metrics to reverse-engineer marketing budgets CAC = $6,000 Close rate = 33% Qualified leads = $2,000 each Qualification rate = 20% Cost per lead = $400 Web conversion rate = 5% Web traffic = $20/visitor What channels, strategies, content can drive leads for $400/each? $20 web visitors?
  42. 42. 5) Sales forecasting / quotas CAC = $6,000 Sales Salary = $6,000 =Close one deal per month LTV:CAC Ratio = 5:1 They ask: “Can we do XYZ?” Because ratio is healthy: clear YES!
  43. 43. 6) Team forecasting Pipeline = 4 new customers LTV = $25k Total new value = $100k ? Staffing ? Support ? Overhead/infrastructure
  44. 44. 7) Find more of the right clients MY VAMPIRE MATRIX
  45. 45. KNOW THY MAGIC FORMULA
  46. 46. jesse@magneti.com /in/jessemarble /jessemarble

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