Wednesday, June 22nd, 2016
In order to be profitable, we previously have to sell a product or service to a customer, and prior to that, we have to invest money to acquire these customers.
Customer Acquisition Cost (CAC) is the cost associated with convincing a consumer to buy our product or service, including research, travels, marketing, and advertising costs.
Customer Lifetime Value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer.
The aim is that we have to be able to acquire our customers for less money than they will generate in value of the lifetime of our relationship with them. That is, the cost of acquiring the customer (CAC) must be lower than the lifetime value of that customer (LTV).
Therefore, we have to pay adequate attention to figuring out a realistic cost of customer acquisition.
Based on some studies, it costs 6 to 7 times more to acquire a new customer than to maintain an existing one. (Another point is that existing customers are less sensitive to price than new customers and are more likely to be a source of future referrals).
Summing-up: A simple way to focus on what matters in the vast majority of business models is look at these two questions:
- Can we find a scalable way to acquire customers?
- Can we then monetize those customers at a significantly higher level than our cost of acquisition?