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Hal Licino

CLV & CAC = ROI: Understanding the Alphabet Soup

Jul 22 2013, 06:00 AM by

 

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If you get a migraine when you try to wrap your head around online marketing CLV (Customer Lifetime Value), CAC (Customer Acquisition Cost), and ROI (Return On Investment) formulas you might find relief by comprehending that you don’t have to be a math whiz to master these key calculations. Yes, they are indeed mathematics but if you spent most of your time daydreaming during high school math you can still apply some primary basic formulas which will allow you to comprehend how well (or how badly) you’re performing in the online marketing sphere.

The importance of the CLV
The first aspect to master is the CLV which is the amount of revenue that the average customer will generate for your brand during their engagement with you. Let’s assume that you are providing access to an online software suite based on the monthly fee model. The average customer is buying your $30 a month program and keeps the subscription going for two years. The calculation is simplicity itself:

The amount spent per month ($30) x The number of months (24) = CLV ($720)

The importance of the CLV is to determine the value of each new customer. Over the long run you can be assured that each new customer you can get to sign up for your online software subscription is going to generate $720 for your company.
Does your CLV equal your CAC?
Now that you know your CLV is $720 you have to determine what the cost was to acquire that customer, the critical CAC. If you’re spending a total of $72,000 and attracting 100 customers you might as well lock up the office and go to the beach to sip Mai Tais, as the CAC calculation is:

Total online marketing budget ($72,000) / The number of new customers (100) = $720

Your CAC should never equal your CLV, actually most online marketing experts will tell you that if you’re arriving at a CAC number that is more than 10% of your CLV your campaign is in really big trouble. So for a total online marketing budget of $72,000 you should be attracting 1,000 new CLV $720 customers, not 100!
E=mcROI
You don’t need to be an Albert Einstein to take the next step to determine how to even further increase your ROI. Take the figures we know so far:

Total Online Marketing Budget = $72,000
Customer Lifetime Value = $720
Customer Acquisition Cost = $72
Acceptable Number of Customers for Positive ROI = 1,000

So your ROI is:

(CLV $720 x Number of Customers 1,000 – Total Budget $72,000) / Total budget ($72,000) = ROI $9

Therefore you’re making nine dollars for every dollar spent which is one exceptionally profitable ROI!

Jiggling any of these figures around will change the ROI calculation considerably. Let’s say that you’re able to attract 2,000 new customers with all the other figures remaining the same:

(CLV $720 x Number of Customers 2,000 – Total Budget $72,000) / Total budget ($72,000) = ROI $19

Now you’re earning nineteen dollars for every dollar spent which means that your retirement to Tahiti has just gotten that much closer. But there are other forms of jiggling which will get you to stratospheric ROIs as well, such as increasing the CLV:

(CLV $1440 x Number of Customers 1,000 – Total Budget $72,000) / Total budget ($72,000) = ROI $19

Or increasing the effectiveness of your online marketing campaign to the point where you can attract the same amount of new customers with half the budget:

(CLV $720 x Number of Customers 1,000 – Total Budget $36,000) / Total budget ($36,000) = ROI $19

Again, make sure that you’re not failing in attracting enough new customers and run into the ROI wall:

(CLV $720 x Number of Customers 100 – Total Budget $72,000) / Total budget ($72,000) = ROI $0

Calculating an accurate ROI for your online marketing campaigns doesn’t require the computational capacity of the Large Hadron Collider’s computers, all you need to do is to apply these exceptionally common sense formulas so that you can maximize your return on every single dollar spent in your online marketing activities.

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