Cost to acquire v long term value — CTA v LTV

Big Red Car here.  So it is another crisp day here in paradise.  On Earth as it is in Texas!

So The Boss is out early.  Have to pay property taxes today.  Not in a good mood, The Boss.

Having coffee with a pal of his and the issue of customers and getting new customers comes up.  The Boss has always been a customer centric kind of guy.  They discuss the metrics of evaluating the cost to acquire a customer versus the long term value of a customer.

Cost to acquire

The “cost to acquire” a customer is the total of all costs expended in chasing customers divided by the total number of new customers.

Total up all the money spent trying to identify and obtain new customers and divide by the numbers of successes — new customers attained.  This will aggregate ALL the costs even for unsuccessful attempts at customer acquisition.

Simple calculation though it may take a bit of rummaging through the accounts to identify all costs.  If you have some that make you say “hmmmm”, then just make more than one set of numbers.  But do get those numbers together.

Long term value

Take the revenue you anticipate deriving from all new customers — average customer spend x number of customers — and divide by the total number of new customers.  Same metric as above but focused on revenue rather than expenses.

Do the same thing with net revenue.

You will have to do some digging and make some assumptions as to where the revenue numbers belong.  But play with it and arrive at some consensus estimate of the additional revenue from new customers.

Click on the graphic to make it larger and more readable.

Time period

To do this effectively, you will have to use different time periods to assess revenue and perhaps expenses.

You might look at over the next 12 months or the next 3 years.  It may be useful to assess the average shelf life of a customer.  Your business model will suggest the right time period.

When in doubt, make multiple calculations.

Other considerations

This discussion is not intended to be a perfect formula out of the box.  You will have to do some analysis to make it work for you.  You will develop that for your own business model.  What is intended is to get you thinking about the obvious.

What does it cost to acquire a new customer?

What is the long term value of that customer?

What is the return on investment of an incremental dollar invested in customer acquisition?

Once you have begun to look at customer acquisition in this manner, you will find it much easier to make decisions about incremental marketing expenses as you will know  the implications of CTA v LTV.

But, hey, what the Hell do I really know?  I’m just a Big Red Car.

Be kind to yourself and call an old friend today.  They probably just got done paying their property taxes and are depressed.  Cheer them up.