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How do you determine customer acquisition cost and lifetime value for a content company?


I am building out my pitch deck and received feedback from a person stating I need to include customer acquisition cost and lifetime value.

I understand that there are a few different approaches, with the easiest being dividing expenses by number of customers. But as a media focused website, we are right now we are at the stage where we don't have "customers," which I would define as people that make revenue off advertising dollars.

We also plan on rolling out ecommerce in the future.

With both of these models, do you have a way to project CAC and LTV, or what I should be looking for?


4 Replies

LanVy Nguyen
2
0
LanVy Nguyen Advisor
Founder & Managing Director at Fashion4Freedom

It's EXTREMELY difficult to estimate a LTV of a customer--you really cannot, especially for a business case.


That said, you want to prove your product/service to have so much value that it should exceed cost of customer acquisition by X-time. Financially speaking, you should assume 100% cost and customer acquisition rate on par with "social media" average rate of LIKEs (10%).


EXAMPLE:

Target audience: 1000, cost to market to 1 customer: $10, acquisition marketing cost = $10,000

Rate of acquisition = 10% = 100 people, acquisition cost/customer = $100


Your revenue-per-personshould be about $200 to break-even beyond just the acquisition cost so to account for your basic operating cost.


Now, the wisdom of whether to spend $100 for customer acquisition is a different question based on how you price your service/product and the hook required to retain each customer.











Sidney Sclar
0
0
Sidney Sclar Entrepreneur
SID the SECURITY PRO at sidthesecuritypro.com
Why would you quote prices when it is not necessary to close the deal?You are not selling groceries or clothes.
Amy Madonia
0
0
Amy Madonia Advisor
VP of Ecommerce & Marketing at Donna Morgan & Ali Ro
LTV and CPA (or CPO) as you are calling CAC, can be calculated but both require an understanding of the business model, advertising costs and repeat customer rate. I have done projects like this on a freelance basis in the past.
Ryan Nobrega
1
0
Ryan Nobrega Entrepreneur • Advisor
Head of Growth and Engagement at Flywheel Software Inc.
You will want to represent this on a unit basis, i.e., a single, average user. If you have distinctly different classes of products and customers, you can separate accordingly to add clarity.

For CAC, you should look at the total acquisition-related costs of bringing an average new user into your service and converting that user to a revenue-generating user (acquisition-related costs would only include expenses directly attributable to driving new users to your service). If you have an advertising-based revenue model, this would be the cost to generate an impression, a click through, an action, etc... based on your revenue structure. Users acquired organically have a zero cost (SEO, viral, etc...) and will average your CAC down. You will likely want to model different conversion funnels by acquisition channel, and your expected mix by acquisition channel, to come to a blended average rate. It will be helpful to reflect these assumptions as you explain your model.

For LTV, you will need to estimate the total revenue generated by the average revenue generating user (i.e., the user from the above CAC profile). For an advertising model this would be frequency and magnitude of engagement over time; e.g., in a simplified form this could be pageviews per month over the total number of months the user will engage with your service, using your revenue model to calculate a total dollar amount generated.

As an example:

CAC
Let's look at a single channel for simplicity. Let's say you've struck a partnership deal where you will spend $10,000/mo to have prominent place on a website in an adjacent market segment. Over the course of the month, one-million unique users will see your promotional unit and you expect 1.5% to click through. Once a user clicks through, they hit your site, immediately see ads on your site, and now are officially generating revenue.This would produce 15,000 revenue-generating users at a CAC of $0.67 ($10,000 spend / 15,000 acquired users).

LTV
Let's say over their lifetime, these 15,000 users will generate 1MM cumulative pageviews, your ad revenue model is CPM based, and your rate is $5/CPM. This would yield $5,000 in total revenue for the lifetime of these users, and an LTV of $0.33 ($5,000 revenue / 15,000 acquired users).

That would produce a negative ROI, not viable.

Now let's look at incorporating your ecommerce model and update the LTV definition to reflect the change.

LTV w/eCommerce
Let's say of the acquired users who hit your site, 5% will convert and transact against your eCommerce offering, with an average purchase price of $250, and an average of 2 purchases over their lifetime. With these assumptions applied to the above 15,000 acquired users, you would generate an additional $375,000 in revenue producing an eCommerce-based LTV of $25 ($375,000 eCommerce spend / 15,000 acquired users).

Combined with your ad revenue, your total LTV is now $25.33 against a $0.67 CAC, now a stellar ROI of ~3,700% (and you may question the continuation of your advertising revenue efforts).

Take this same framework for evaluating a partnership and apply it to your broader marketing efforts and you will have CAC and LTV at an enterprise level.

Note that your assumptions and economics may change over time, so you may find a time-based model (e.g., month-by-month over 3-5 years) best reflects your customer economics. This will also lend itself to reflecting the launch of your ecommerce model in the future, as some % of users will transact against that product, as well, driving their LTV up, as illustrated.

Having actual data to drive your model is ideal, but not always possible. Where it is not possible, use defensible industry comps with sources. If you end up relying heavily on assumptions, you may want to reflect a range for CAC and LTV and be prepared to speak well to the rationale behind it.
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