#13 Relevance of LTV and CAC Metrics

Welcome to our series, OMG: One Metric for Growth, where we dive deep into real-life examples of how one metric helped an organization to grow their business. Today's Metric for Growth is: “Relevance of LTV and CAC Metrics” 📈

What is LTV and CAC Metrics?‍

‍LTV stands for lifetime value, which the business expects to earn from a customer throughout the relationship. For example, if the customer gives us 10 lacs of business each year and stays for 10 years with us, the LTV will be 1 crore. Sometimes LTV is calculated from gross profit perspective. If the gross margin is 5%, LTV will be 5 lacs.

CAC stands for customer acquisition cost, representing the spent on acquiring new customer. Your CAC is the cost of marketing activity that is done to acquire new customers divided by new customers acquired during that period.

In the Startup ecosystem, LTV and CAC are key metrics to check the sustainability of the business.  

How it is relevant in Traditional B2B businesses?

‍In traditional businesses also, LTV and CAC provide significant benefits. Let’s discuss this with few use cases.  

1.⁠ Exceptional discount for regular customers
⁠Sometimes, our regular customers demand extraordinarily exceptional discounts on a particular deal, and it is not viable for us to accept that discount, as transaction to transaction it is perhaps a loss or no profit.  But still, we can consider honouring the discount if we look into LTV that customer is providing us.  

2.⁠ ⁠⁠Reviewing Marketing Spending on New Customers
When we do any marketing activity, we can bifurcate the expenses into 2 parts. Retention of existing customers and acquiring new customers (Along with the new customers acquired during that period). Once we are ready with both information, CAC can be reviewed, and we can make more informed decisions on our marketing spend.

3.⁠ Informed Decision-Making
⁠⁠When we have the handy data of CAC and LTV, it becomes easy for us to take action on new and existing initiatives for marketing spend.  

4. Analysing Marketing Spend on Existing Customers
While preparing this, we will also have information on marketing spending on existing customers. The per-customer spend versus the gross margin can help us to uncover new insights.

How to implement LTV and CAC?

1. Data Collection  
Gather data on customer purchases, average customer retention, and marketing spending. This data is the basis for calculating LTV and CAC.

2. Segmentation

Segment your customers based on different parameters such as Retailer, B2B, Government, Corporate etc. Customers can also be segmented based on their buying behaviour. This will help you analyse the data in detail.

3. Continuous Monitoring
Regularly monitor these metrics to identify trends and make necessary adjustments based on your business needs and market. This ensures that your business remains competitive and profitable.

4. Use Technology
Take help from CRM and analytics tools to track and analyse customer data. These tools can automate the calculation of LTV and CAC, providing real-time insights.

Whenever You are Ready! 🔑  ‍

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