Why You Should Care About Customer Lifetime Value & Acquisition Costs

By Kevin D'Arcy
August 23, 2018
Customer-Acquisition-Cost

Success is the projected target for every business. Without guidelines to accomplish projects and turn a profit, any company is likely to fail and suffer the consequences of not achieving their goals on time. It is crucial to remember that customers are the fuel for success. Businesses need consumers to procure revenue. If there are no customers, a company cannot flourish and grow as intended.

However, it is also important to note that to acquire customers and develop as a renowned company, marketing is essential. It is strategic advertising that attracts customers to a business and encourages them to place their trust in that brand. Further, it is the measurement of company data such as customer lifetime value and customer acquisition costs that indicate the actual value of successful advertising practices.customer-lifetime-value

What Is customer lifetime value?

Customer lifetime value is a type of measurement that identifies the total gain or profit that is obtained from a customer. Overall, this metric provides a general estimate of a customer's commercial value to a business over a period. It gives an overview of how much that client is likely to spend with your company and contribute to its income.

Why is customer lifetime value important?

In relation to marketing, customer lifetime value is very significant. It gives an idea of how strong marketing campaigns are performing. By identifying successful promotions, companies can analyze the core advantages of their practices. They can see what works, replicate those choices, and continue to implement the right tactics that attract valuable customers without spending imprudently.

Lifetime value is calculated by subtracting total customer costs from total customer revenue. By evaluating this metric, companies can identify valuable customers, and appropriately allocate funds to retain their business. Devoted customers will continue to generate profits, and it is 

crucial that these beneficial relationships are fostered.

What does customer acquisition cost mean?

To properly sell goods and services, companies must market to consumers. This process involves researching and advertising, which comes at a cost. Customer acquisition refers to the marketing expenditures spent on obtaining and securing new customers.

Customer acquisition cost is important because it delineates the amount of money that can be received from customers, and it illustrates the expense of attaining them. It references the steps but also the cost required in coaxing consumers to buy into a brand. Understanding customer acquisition cost is essential because it underscores the value that each customer brings to the business as a result of marketing.

Why should I worry about customer acquisition cost?

By knowing this figure, companies can improve their profits and reduce losses. Additionally, they can advance their place in the market by strategically acquiring customers, limiting expenses, and in turn, increasing their revenue.

How do customer lifetime value & customer acquisition cost correlate?

lifetime value and acquisition costCustomer lifetime value refers to the profit received from a customer over a lifetime whereas customer acquisition cost identifies the expenses put toward acquiring a customer. These two relate to one another as they work seamlessly to identify the outflow and inflow of money in a business.

The reality is, lifetime value increases as a customer continues to support a business. The more loyal and confident they are in your brand, the more likely they are to purchase your products and services. Spending less on customer acquisition (obtaining and retaining customers) offers a promising outlook for businesses. It limits the need to spend extensively on keeping customers, therefore, allowing companies to grow profitably.

These metrics provide an understanding of a customer's total value by contrasting the amount spent on acquiring and keeping them with the money they spend on your products or services.

Calculate your customer lifetime value to acquisition cost

To help ensure you keep your costs properly aligned, we've developed the following tool to help you calculate your lifetime value to acquisition cost ratio.

 

How can customer lifetime value & customer acquisition cost be improved?

If you find that customer lifetime value and customer acquisition costs are not meeting your expectations, there are a few ways to improve these metrics. Consider the following:

  • Improve Your Conversion Channels: Find ways to enhance your conversion channels by making it easier for leads and prospective customers to turn into real supporters of your brand. For example, make your emails, website, and all of your content mobile- and user-friendly. Make your links more visible and accessible.
  • Offer Referral or Loyalty Rewards: Aside from receiving the products they order, consumers also love being rewarded. Consider developing a plan that recognizes customers for their support and willingness to mention your brand to their friends and family. These programs will reduce acquisition costs while increasing customer lifetime value.  
  • Utilize Social Media & Free Platforms: Social media is a beneficial platform for any business. It gives brands access to a pool of consumers waiting to engage and follow a savvy company. Consider using social media to increase brand awareness. It is free to use and can provide a plethora of practical benefits.

ThinkFuel Marketing is an innovative digital growth agency specializing in working with B2B technology companies. We proudly provide solutions that are designed to help your business gain access to targeted consumers and increase your revenue. For more information about ThinkFuel, our services, and how we can help your business, contact us today! 

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About Author
Kevin D'Arcy

As our Chief Marketing Enthusiast, Kevin strives to provide clarity, honesty, and unique insights into every one of our engagements. Kevin helps companies improve their lead generation, enhance customer acquisition, and increase revenue. With over 18 years of inbound and content marketing experience with B2B technology companies, Kevin brings a straightforward approach to marketing with results that can be measured. He also has the most adorable hound dog that frequently comes to work with him.