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Apologies. CAC is "Customer Acquisition Cost" and LTV is "Life Time Value". e.g. If I buy $100 of ad views and over all of those ads get 10 new customers, then
by danpalmer 3y ago
Apologies. CAC is "Customer Acquisition Cost" and LTV is "Life Time Value".
e.g. If I buy $100 of ad views and over all of those ads get 10 new customers, then my CAC is $10. If a customer on average spends $100 over their lifetime (typically defined as 3 or 5 years, but varies per business) on orders that cost me $70 to fulfil, then their LTV is $30 (Edit: as marketing is not included in gross profit).
- brandall10 3y agoWould it not be $20, or does eve acquisition cost not factor?
- danpalmer 3y agoGood question, but it doesn't (I've updated the comment). The LTV is in terms of gross profit not net profit. It's the revenue minus the direct cost of fulfilling that revenue (cost of goods sold), so it would include: products, shipping, packaging, payment fees, staff time for handling, etc. It would not include: marketing, customer support (surprisingly!), R&D or creating the product, fixed costs such as offices, staff, etc. I'm not quite sure what the best practice is on accounting for salaries of the marketing department. I think you wouldn't typically include full time employees managing marketing channels, but if you outsourced marketing to an agency you probably would account for the all-in cost to acquire customers via the agency, as they are almost their own marketing channel in a way. It really varies though, and I could be wrong on the best practice here.
- HWR_14 3y agoIt's $30 because people look at the ratio. That is, LTV/CAC is an important ratio that takes both into account. It makes more sense if you think about it as a function that turns CAC into LTV.