If you were to perform one calculation that validated your business model it would be this...is my customer lifetime value greater than the cost of bringing onboard a customer? If not, your business is a no-go. If it is, you've got the potential to succeed.
In this episode Alex and Emma deep dive into the world of Customer Acquisition Cost and Lifetime Value, and help you understand why these 2 metrics are vital. We highlight the key aims for both (hint: lower CAC, increase LTV) and how you can look to do this.
We've included a transcript below in case you can't listen at this moment in time.
In this episode, you'll learn:
- What is Customer Acquisition Cost
- Steps you can take to lower CAC to ensure your business is profitable
- What is Lifetime Value
- How you can maximise lifetime value and unleash a key growth channel
- How CAC and LTV link together to help you understand the viability of your business
Links and resources mentioned in this episode:
The effect of Field Sales on Customer Acquisition Cost
How to calculate Lifetime Value
Thanks For Listening!
Thanks so much for joining us this week. Be sure to join us in episode 5 where we will be discussing empathetic marketing, and how this strategy could be the key to converting more prospects into customers.
Have some feedback you’d like to share? Leave a note in the comment section below.
Episode 4 - CAC and LTV
[00:00:01] Welcome to the Leadspeak podcast with me, Alex Thackray.
[00:00:17] Welcome to episode four of Leadspeak. The podcast where we'll be talking about automated sales systems that you can build into your own business. Who am I? I'm Alex Thackray, founder of Leadfreak, where we build automated sales systems for many different business types. We want to pass on some of the expertise and knowledge that we have to you.
[00:00:40] Hi, and welcome back to Leadspeak, this is Episode 4. We've had some great feedback for the first three episodes, those fundamental episodes where we've been looking at what automated sale systems look like, what's the framework that we use in Leadfreak, and how you can put that into your own business.
[00:00:56] Today we're going to be talking about customer acquisition cost and lifetime value. For me two of the more fundamental metrics when we're looking at holistic sales systems for businesses of different types.
[00:01:09] With me I've got Emma Thackray, she's the editorial director at Leadfreak. She's going to be taking some of the questions we've had from our clients from our prospects, you know, people around our business as to the deep dive into these two metrics. So we're going to have a discussion around what they are and around how you can optimise them for your business. So before we begin we'll have a little hello from Emma.
[00:01:37] And off we go.
[00:01:44] Okay. So as Alex said today we're going to be talking about customer acquisition cost and lifetime value which are two of the key metrics and there's something that we tend to get a lot of questions about from our clients.
[00:01:57] So, probably the first and the biggest question that we really need to answer is what is it basically, so we're going to start with customer acquisition cost. What Alex is Customer acquisition cost?
[00:02:13] So in speaking to our clients for me customer acquisition cost is exactly what it says on the tin. How much does it cost your business to bring on-board a customer, to purchase in your product. And how, one overall what is that cost? What is cost per channel? So if you use numerous channels to bring the customer on-board how much would it cost to bring each prospect through that particular channel.
[00:02:42] What kind of channels would you use?
[00:02:42] Being digital marketers we would generally be looking at, you know, social channels, e-mail channels, and online website channels but looking more in to the wider world where you have different business models, you might have a freemium base SAAS product where you know you're looking for people to trial you can be they buy you as well as a very good low customer acquisition cost business model.
[00:03:14] There's obviously a lot of work to convert from free to purchase, but that is all part of the process.
[00:03:20] And the other end of the scale, which is you know highly specialised, high value products which require a dedicated salesman , or saleswomen to be selling that product.
[00:03:33] I feel like you said saleswoman because I'm here. Thanks for that.
[00:03:37] Not at all. So where you have a dedicated resource to sell your product or service, you know, and it's a face to face discussion and it takes hours and days, and you know, you secure so many deals per year then the cost of that salesperson is taken into account of customer acquisition cost.
[00:03:58] So it can range from pounds or pennies depending on the low cost channels to thousands of pounds per sale.
[00:04:11] Okay, awesome. Let's move onto the next question. Think you've answered that pretty well. So why is it so important then, why exactly do we need to know and be sure of what the customer acquisition cost is?
[00:04:25] So I think there's kind of three levels to this.
[00:04:29] What the fundamental level is, if your customer acquisition cost is greater than the value of the product or service, then instantly that is not going to work and your business is going to fail.
[00:04:50] If your customer acquisition cost is lower than the price of the product but you know you still have to take into account the cost to deliver that product or service. So if your customer acquisition cost is lower than the price of the product but still wiping out all the profit you're going to make from that product. Then again this is a negative is, it's a no go.
[00:05:11] So what the perfect scenario is, is that the customer acquisition cost is lower than the price of the product and service minus the costs minus the cost of delivery, and gives you your required rate of return on the products that you're selling. Because we all have business goals, we all have financial objectives, we all have strategies and budgets which are dependent on achieving a certain profit. So you have to take all of that data into account when you are analysing what your customer acquisition cost should be.
[00:05:44] Okay so it's definitely something that's really important then and everybody has to be we sure of early on.
[00:05:50] And it's surprising to speak to so many clients many businesses who one, never consider it, never consider what their customer acquisition cost is, and what it can be.
[00:06:01] Yeah, yeah, I've been there certainly.
[00:06:01] And also you know how do we calculate? They've never entered that discussion in mind, it's literally, this is not product and service. Now I need to sell it so I'll to sell it to whoever wants to buy it.
[00:06:13] Yeah same. Yeah I mean I've had that in the past where we just chuck out Facebook ads without really considering how much it cost or what the goal is or even really who we're selling to. So such a huge error to make but you don't necessarily even realise that you making it until you kind of talk to people who actually know what they're talking about in that kind thing.
[00:06:34] So yes they're obviously very important. So another big question then once they obviously know what customer acquisition cost is and why it's important is what kind of thing impacts customer acquisition costs. So what sort of things have an impact on what that is.
[00:06:54] So I touched on it a little bit earlier where there are different business models, individual businesses take to on-board clients, so one, it might be the freemium model it might be a dedicated sales person. So that is one factor to take on board.
[00:07:12] It's funny, I've seen data plotted on a graph which showed average customer acquisition cost depending on the method to bring the customer in, and it's one of the reasons I also think why Leadfreak as a digital sales system builder is so busy at the minute is because, using people to sell products services is massively expensive. And actually when you see plotted on a graph is exponentially more expensive than using a digital source for that same customer. You can you can actually picture it, if you're having to pay someone's salary, plus commission, plus bonuses, plus admin regarding employing that person,
[00:07:53] Yeah just the cost of employing somebody
[00:07:55] And they get so many deals per year you know all that cost is spread across each of those deals.
[00:08:01] Mm hmm.
[00:08:03] So certainly how you're selling your product is a key thing for me in terms or that customer acquisition cost is. Another one is at what point in that buyer journey do you begin talking to people?
[00:08:17] When do you begin actually trying to close the sale? If you have sales people and you're speaking to them earlier in the buyer journey, the customer journey, then it's going to be more expensive. Because not only is your sales person's time spent among those people that actually buy but now you spread it across the people that don't buy. And I think for me those are the two main factors when it comes to what impact excessive cost.
[00:08:46] So how do you track that. What's the best way of tracking customer acquisition costs?
[00:08:50] When it's through a sales person. I think you've just got to be clear with the numbers. You've got to know how many sales people have got. What's the cost of each salesperson. What's the cost of the surroundings support facilities around that salesperson, because not only do you have the sales person themselves you've generally got an internal sales team.
[00:09:12] So the cost of the whole the cost of the whole sales ecosystem. What is that. How many deals are you creating, making in a year, a month. And just being clear on what those numbers are so that you can continue to track that as a key metric.
[00:09:28] When it comes to digital systems we use lots of different data points within that journey to work out the cost per acquisition. So whether it's cost per click, whether it's conversion rates on different levels of that buyer journey, in different stages within that funnel, and then how many people are converting and was the price of that conversion. And we can track that all the way though so we can then see...
[00:09:58] How do you track that?
[00:10:00] So that a lot of the platforms we use have that ability to track within the system themselves. Well in the platforms themselves. Okay let's take social, so we use a lot of Facebook stuff, we use LinkedIn, we use e-mail, all of that we can apply these metrics to but what we've also got to consider is the time it takes to run those campaigns and to manage those channels. But being able to break it down channel by channel then gives us, you know, that insight into which channels work for us. And if one channel is greater than the others we put more investment and time into that channel to maximise, to reduce that customer acquisition cost across the board.
[00:10:40] So what's the what's the key goal of customer acquisition cost? I guess for the people listening to this it might be to reduce it, they might be kind of almost starting to think about it for the first time, and how they can they can reduce it, but how might you do that and what are the other key goals.
[00:11:06] So I think you know you hit the nail on the head. We've regard to the key goal it's got to be reducing customer acquisition cost.
[00:11:13] Sorry, did I steal your answer. I said at first.
[00:11:19] But is has got to be the key goal. Yes you've got to reduce it but how do you reduce it? Now, one way that we reduce it is to reducing that human touch within that sale. That for us is the key element, because I say I've seen the data and I'll put in the resources section on the website, I'll put you know the graph that I've see so you can see for yourself the exponential growth rate when it comes to, as soon as you've bring a human salesperson on-board, compared to a digital system.
[00:11:53] So I mean for me that's one way, a key way, that you can look to reduce it.
[00:11:56] Is there any , do you get a lot of people worried about removing the human touch, obviously, you get sales people who are very good at what they do obviously, and a lot of marketing is obviously humans talking to other humans. What do you say to people who are worried about removing that human element and doing it all digitally.
[00:12:22] I think the big risk for people is that one the digital systems a change from the way we work now, which okay, we bring salespeople on board we know we have the processes that allow them to sell.
[00:12:35] But, I've worked in face to face sales and know lots of different types of salespeople. One the really good sales people are few and far between.
[00:12:48] 2 it's completely subjective. A sales person who's got good experience selling in one place might not sell very well in another place. Obviously you train and you improve prove their sales performance over time but for me you can do that with a with a digital system.
[00:13:05] I wouldn't say, you don't he'd have to replace the salesperson with a digital system, the digital system can, one shift that human contact to the end of the buyer journey which is one element I've talked about.
[00:13:16] But two you can also educate your prospects on your products without a salesperson having to do that. If they're just repeating the same messages over and over again because your prospects have the same questions you can deliver the answer to those questions digitally and you can track where that person is within that journey so your sales person knows when they should be in touch.
[00:13:39] Yeah and so by the time the salesperson actually speaks to them they're already you know they already are well educated and informed about their product or service or whatever it is then a lot more kind of warmed up an d ready to go I guess.
[00:13:52] It's almost a conversion discussion rather a educational discussion. It's a we know, you have this problem, you know you have this problem, you see how our products are service works and how it can be a solution to your problem. So let's just close the deal.
[00:14:06] Some people do like that humans human conversation so that's not going to ever be removed. Certainly in some products and services.
[00:14:15] Yeah I was reading about it the other day. How in the past when somebody, a potential customer, spoke to a sales person for the first time they were 30 percent sold on the kind of product already. But nowadays they're more like between 70 and 90 percent sure that they want to make the actual buying decision before they buy because they're generally already so well-educated on it before they even speak to somebody.
[00:14:46] And that's the perfect scenario. Yeah because nobody likes to talk to people nowadays.
[00:14:51] I don't.
[00:14:53] Certainly not when they're not educated about the products or service.
[00:14:55] Yeah exactly because nobody wants to be sold to from the off especially when you don't know exactly what it is you're purchasing to start off with. I'd much rather go onto a website and have lots of, that's so much of what I do as well is actually creating the content and the education on people's websites isn't it. So that buyers are completely educated on the product and service of all their questions can be answered and then they feel more in control of the decision and then when they're ready to talk to somebody face to face they do so.
[00:15:29] And it's a key point in our content strategy where you know we're looking at being straight to the point. Asking the questions our clients and prospects are asking us and providing the information. So that's the base point for all our blog posts it's the base point for Leadspeak, it's the base point for any conversation we have with our potential clients and our clients is "we're already giving you the answers to the questions that you might have".
[00:15:55] Yeah. And a lot of that comes from Marcus Sheridan's book "They Ask , You Answer" which is an awesome book.
[00:16:05] And that is really good.
[00:16:06] It works basically on the principle exactly doesn't it, that you know, brainstorm, think of all of the questions that your clients or potential buyers will ask you and answer these questions on your site through blog post, videos, whatever. And that's the way to do it, it's a really really good book.
[00:16:25] Yeah. Be a credible expert. Basically becoming a credible expert by giving all information. Just offhand.
[00:16:33] I think just keeping to the customer acquisition cost discussion.
[00:16:38] The other key goal for me, certainly at an early point, if you've not considered customer acquisition cost is know the numbers. Put the system in place that you can actually then track how much it is going to cost you to bring on your prospects or how much an average.
[00:17:02] And set that goal. And say we know how much it is now costing we need it to cost this much so what processes, what improvements do we put in place to make that happen. And I don't think we need any more on the two key goals with regard to reducing customer acquisition cost. What can you do to reduce human touch, human contact, and two, know your numbers.
[00:17:27] Yep, keep it simple. Simple enough. Okay I think that's all we've got on customer acquisition cost now but I guess if the people listening have got any more questions about it they can send them in and we can certainly answer them next time.
[00:17:48] So I think we'll move on to lifetime value as a metric and to be honest this is one of my key metrics. I'm so passionate about Lifetime value.
[00:17:56] You love lifetime value.
[00:18:00] I hosted a lecture at Aston University and pretty much for the three hours I was boring those students it was all about lifetime value.
[00:18:09] I am sure they found that really really amazing. Okay so let's let you go on about it for a bit longer I guess. Not too long now I'll stop you. You go off on one. So okay then, so simplest question may be, most difficult question, what is a lifetime value.
[00:18:33] Yeah. Okay so it seems like a simple question to ask what is lifetime value. So in its simplest form lifetime value is - how much each customer pays to your business, how much revenue do you generate from each customer on average. What is that number. Because you might not sell just one, two, three products to one cost. It might be the whole business model is to sell 5, 6, 7. So what's the number. What is the revenue generated per customer. That's what lifetime value is.
[00:19:07] So by the time first hear of you till they drop off and never buy from you again.
[00:19:17] There's a simple example which is take Starbucks. If Starbucks sells one coffee per week to the same person every week for 20 years that's your lifetime value. Now there are three calculations and again this is another thing that I'll add to the resources, there's kind of three ways to look at lifetime value. One is just on revenue. One is on the profit and taking into account your desired profit goal. And the third way's a bit more complex. It looks at integrating customer retention rate and discount cash flow interest rates into the calculation of lifetime value, so you can tell by by that description that it's a bit more complex.
[00:20:04] If you're being clever about it, you'd calculate the three because they give you a lower level and a top level of what that customer lifetime value is, you average it out across the three then you say actually this is my average lifetime by taking into account all those different factors.
[00:20:21] If we just touch on customer acquisition cost again, what the academics say is that, I am academic...
[00:20:30] One of the Elites.
[00:20:33] If your customer acquisition cost is less than the lifetime value of your customer, based on the average, then your business model is go.
[00:20:45] Okay that's like the golden ticket to your business. I'm worth it.
[00:20:51] So yeah and the more you can spend to acquire customer the better you'll do. Yeah because you'll just beat the competition.
[00:21:00] Yep, yeah yeah, there are lots of companies that spend loads on, that's how they do it. Yeah just spend more than the competition and you'll win basically which is quite interesting.
[00:21:17] Does advocacy have anything to do with lifetime value. So if you've got loyal customers who recommend you to people then does that play a part in it, is that something you measure with lifetime value. So if they then obviously bring you more value by spreading the word does that have an impact on them.
[00:21:39] You could certainly add that in as a quantitative factor within lifetime value.
[00:21:45] I guess it's hard hard to measure isn't that sort of thing.
[00:21:47] You don't want to be kind of double booking it and saying, well if Fred recommends Joan and Joan starts to buy based on what Fred is saying, then I'm going to take some of that value and apply it to Fred because he's brought a person in.
[00:22:01] It will take it away from Joan.
[00:22:02] Yeah, you want to calculate it for Joan.
[00:22:04] Yes yes. Fair enough. Don't want to over complicate it. I suppose it's just something to bear in mind I guess.
[00:22:10] You'd just look at that as a separate metric. So what's my average referral value as a separate to lifetime value and saying as a business strategy because advocacy and referrals are a real cost effective way of bringing new customers, again will go back to customer acquisition cost. If you can bring in the majority of your customers through referrals, the referral being the most cost effective customer acquisition you can get because basically you don't have to sell to them.
[00:22:40] Yeah yeah it's free, or near to free anyway.
[00:22:44] So it's an important discussion about how how you maximise that number but for me it's a bit separate to lifetime value. One of the key points I made in my lecture was that.
[00:22:57] You love talking about this lecture.
[00:23:01] For me lifetime value can almost be a whole business strategy.
[00:23:06] So you have, you know it's a common thing in business theory where profit or shareholder value maximisation is the business strategy. Everything that business does is designed to maximise the shareholder value.
[00:23:22] While that kind of answers the second question I had then which was why is lifetime value so important. If your saying it's everything then that answers that one for me.
[00:23:34] But if I did go one step into that whole philosophy, the element missing in maximising shareholder value is almost like that customer service element, you hear so many stories in 2018 alone where large corporations, it's all about shareholder wealth it's nothing to do with delivering a good service or product, it is what can we do quickly and effectively to increase our share price and get money out to shareholders.
[00:24:01] Lifetime value as a business strategy actually delivers shareholder value because it's operating effectively but at the core of it to maximise lifetime value of customers you have to be delivering a good service. And it's not just selling to them either it is the whole business operations that need to deliver for that one customer in order for them to keep coming back and buying more and more.
[00:24:25] Makes sense.
[00:24:26] And that's for me is why it's so important.
[00:24:32] Okay next question then. How do we maximise lifetime value?
[00:24:42] Think again we mention this for the customer acquisition cost, but one of the key elements of lifetime value is tracking it and actually knowing the numbers. So what is the average lifetime value of your customers and how can you extract more value per customer. Yet. Now it might be you sell one product or service, what complimentary product or service can you provide which is another revenue stream, but it suits your business in this solves a problem for your client.
[00:25:19] So if we look at what we do, we might do workshops and audits which help our clients see where they have holes in their sales bucket, and we can then look at fixing that as our core service. That's where we really like to work. But then we can also look at maintaining and becoming a growth partner. We can then facilitate by giving them access to our Leadfreak academy, so our training services. And also giving them access to the future makers which is the upcoming Leadfreak events around you know solving sales problems for businesses with a mastermind group of people. We can give people access to that.
[00:25:59] So we've really been working on how we can maximise our lifetime value by delivering above and beyond the value that we've delivered in that lower down service.
[00:26:09] Okay sounds good.
[00:26:10] So just to make that simple, how can you deliver more around what your business does to your customers that they will be willing to pay for.
[00:26:23] And how do you measure that then how do you calculate it.
[00:26:24] I touched earlier in one of my answers about what lifetime value is so those three calculations we can look at doing. One is around maximum revenue of the life of the customer over that lifetime, one is taking into account the profit requirements from that transaction. And there's a third one which integrates customer retention rate in discounted cash-flow interest rates. So that's the value of future moneys now. Also incorporates a profit margin within that calculation as well. This is really where you start to look a bit more of a complex calculation, which I'm going to detail in the resource section of the podcast so you can actually start applying these to your business.
[00:27:14] Sounds good.
[00:27:15] Certainly customer acquisition cost and lifetime value for me, and you can see why hopefully from today's podcast episode why they are so important.
[00:27:23] Very important and they work hand in hand as well. So I guess the moral of the story is customer acquisition cost needs to go down. Lifetime value needs go up.
[00:27:33] Absolutely yes. As two fundamental strategies within your business.
[00:27:37] Yeah. Okay. And you just gotta remember which ones which. To avoid disaster.
[00:27:45] Head to the website where you'll find the resources that we've mentioned today and we hope to see you again next time.
[00:27:53] Thank you for joining us. It's been a pleasure. Thank you Emma. You have made this far easier than me trying to do it by myself.
[00:27:59] Are you going to make me do every week.
[00:28:02] Yes, you've just sold yourself.
[00:28:05] Thanks for that. Thanks everyone.
[00:28:06] Cheers guys.