Simple Formulas How to Calculate Lifetime Customer Value (LTV) & Customer Acquisition Cost (CAC)

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Below is a transcript of the Chatbot Marketing Training Course by MobileMonkey and Isaac Rudansky, of Adventure Media. Get the full course here and become a messenger marketing master.

Howdy chatbot fans, and welcome back. In this lecture we’re going to continue talking about promoting your products and services through asking for referrals, and asking your previous customers, or your current customers to promote your brand on Facebook.

But, we need to think about how to structure incentive offers for them to do that, and to build incentives without losing your shirt. When incentivizing customers keep in mind a couple important things.

One, your customers aren’t idiots, they’re not losers. The incentives that you offer them to promote your brand have to be significant and real enough to sufficiently motivate them to go ahead and promote your brand.

They want to earn that incentive offer, at the same time, and this might be sometimes a difficult dichotomy to handle.

You don’t want to ignore your own ROI, your own profit margins, and you want to make sure that you don’t erase profits generated by the original customer, and the customer that the original customer is referring.

So, you have to really keep in mind these two things, so in that spirit, let’s go ahead and learn a couple formulas.

These will be easy formulas, and I know that this has literally nothing to do with building a chatbot per se, but hey, it’s a two for the price of one.

These might be some cool formulas for you to learn, if you know these formulas go ahead and skip it.

But, lifetime value. Okay, lifetime value is the first LTV, is the first formula that we need to understand.

Lifetime value is very simple, it’s the amount of value or marginal profit a customer generates over their lifetime, and a lot of brands, and I’ve had this discussion with clients almost every day, where they say “Okay, what’s your profit margin?” and then they say this, and “what’s your average revenue per client?”

okay, I’m saying “well, how many more times will that customer buy from you? or how many months would that person stay with the subscription?”

Clients will either tell me one of two things; A, they don’t know, and I’ll be like “Okay, well let’s figure this out together, because it’s really well worth our time to figure this out, because lifetime value is an important metric and you shouldn’t just account for the first purchase a customer makes.”

Or a client will tell me “You know, we should just try to be profitable for the first purchase”, and I’ll say “why?” and I’ll usually hear like silence on the other end of the line, because there’s no good reason for that.

If a customer is likely to buy a second or third time, and you don’t need to pay a second or third time to acquire that second or third purchase, then that’s a very important metric to have.

Because that will allow you to get more aggressive and spend more on your marketing campaigns, still being sure that at some point in time you’re going to earn that money back. And this is a complicated—

I’m oversimplifying the process of spending on marketing for lifetime value, it also depends in how long will that revenue be generated over the course of their lifetime, and how much money you have in the bank, and all different sorts of metrics.

But, just the basic concept is important to understand.

So, the formula is just the average profit per customer, the average marginal profit per customer multiplied by repeat purchase rate, or repeat purchases, that equals your lifetime value, okay? So that’s a very simple straightforward formula.

The next formula you want to understand is CAC, customer acquisition cost, which is very simply the total cost associated with acquiring a new customer, how much money do you need to spend to get a customer into your door.

And a typical formula for this is the product costs, like all the costs that go into the product, plus the marketing cost, divided by the number of new customers in that same time period, right?

Let’s say you’re looking at 7 days, or 30 days, or whatever it may be. And this formula is also a little bit of an oversimplification, because the question is do you also include your overhead?

like your rent, and your lighting, and your and salaries, and the answer is yes and no, it really depends on what you’re trying to figure out.

In our example, we’re going to just basically look at what it costs us to produce the product, to ship the product, to service the customer, plus the marketing costs, like how much we’re advertising over a certain period of time, divided by number of new customers.

That’s your most simple and I guess most reliable way of figuring out your basic customer acquisition cost.

So, let’s take a look at an example scenario, and I’m not using real numbers, but I’m using similar or close enough numbers for this to be a real example from my own real-life experience with my client.

So, Las Vegas IV hydration therapy company, we were talking about quite a bit, and I guess it’s just on my mind because I’ve been doing a ton of work, and my team has been doing a ton of work for this client, it’s been a really exciting, especially when we get to get the IV’s, awesome.

Anyway, so let’s just say for example, $54,000 in product costs over the last 30 days, so that means how much it costs us for the materials, how much it costs us to pay the nurses to administer the materials, how much it costs us in gas, and driving, and tolls, getting to the customers, $54,000 plus $12,500

Let’s say in marketing spend over the course of a 30 period, divided by 750 new customers generated in those 30 days, and you do the math and it equals $88.6 is your customer acquisition cost, okay?

Now, we’re trying to figure out the lifetime value of a client, and in our business we don’t need to market anymore to get repeat purchases, that’s not necessarily the case in every business.

So, in our case when we want to calculate a referral incentive program, or we want to start just benchmarking what a good referral incentive program could be without losing our shirt, because that’s the whole point of this lecture, we might want to remove the marketing spend part of the equation.

So, let’s go ahead and do that now.

So, we’re going to remove that $12,500 and we’re going to divide the $54,000 of product costs by 750, and that gives us a $72 customer acquisition cost, right?

So if we take away the actual marketing costs to generate those 750 leads—

And again, I know that this is not the most mathematically accurate way to do this, because in truth you would want to have the marketing cost for the first purchase, and then remove it for the future purchases.

But for the sake of simplification we could do it this way.

If you want to just make sure you’re not being too conservative, add in another few dollars into the calculation and you could also ballpark this, because we’re not we’re not reporting to investors, we’re just trying to figure out a basic structure for an incentive system, and you don’t need to be perfectly scientifically accurate to do this, but here’s a good approach.

So, you have $54,000 divided by 750, we have a $72 customer acquisition cost.

Now, let’s calculate lifetime value using the same numbers in our example. Let’s say our average revenue per sale is $299, let’s say we sell a few different packages, we have a $199 package, we have a 400$ package, we have a 300$ package, but over the course of 30 days our average customer generated $299 in top-line revenue.

We know that our customer acquisition cost was $72, and if we take 72 divided by 299, multiply that by a 100, we get a percentage which is our profit margin, so 24% is our profit margin.

There are a couple different ways we can get to what our marginal profit per customer is, you could multiply the remaining percent by 299, so which will be 299 times 76, that would give you your marginal profit.

If you want to do it mathematically, it’s $299 minus 299 multiplied by 24%, which comes out at $227.24 as your marginal profit per customer.

You’re going to have these slides downloadable, so all these formulas will be saved and you could reference them.

Another way to do it simply is just taking $299 minus your $72 customer acquisition cost, which gives your $299 minus your 72$ customer acquisition costs, which gives you $227, that’s your marginal profit per customer.

So, if you remember the lifetime value formula, you take the $227, the marginal profit per customer, you multiply by that by your average repeat repurchases.

So, let’s say over the course of the same time period we’re measuring we see that our average customer buys two and a half times, right? that would give us a $567.50 lifetime value of a customer.

So, now that we’ve calculated our lifetime value of a customer, and by the way, these are valuable formulas and valuable techniques for all different sorts of marketing channels, these are good numbers for you just to know. We’ve separated from building Facebook chat BOTS.

So, your lifetime value in our scenario, with our example is $567.50, taking into account acquisition cost, taking into account repeat purchase rate.

It’s pretty sophisticated once you really get down and dirty with it, and as a potential incentive structure, maybe we’d offer $100 cash for each new customer referred, plus a 25% coupon for the new customer.

So, this checks both of the boxes that we spoke about earlier on in this lecture, where is it real enough to incentivize the person who we’re asking to promote our brand, and are we making sure that it’s not too much money out of our own pocket to lose our shirt, to wipe away profits generated by the customers, and the answer is; in this scenario, yes. I think 100$ for somebody to just—

I mean, this is an extreme example, you’re going to be able to get away with a lot less than this, but let’s just say in this example we’d offer $100 cash—

and I’m going to talk also about how this actually happens, how are you going to get the $100 cash to the person promoting your brand, and we’re going to discuss that, so I know that might sound a little weird.

But, we would offer $100 cash for every new customer, not just for sharing the link, but if your sharing efforts, if your promotional efforts actually generate new customers for us, we’ll give you $100 cash for each new customer generated, and we’re also going to send your friends, your Facebook Network a 25% coupon on the service for coming through your special link that you’re going to share.

And that’s an example of an extremely powerful, and effective incentive program which has ripple effects.

Let’s say you have 500, and that’s a small number, if you have 500 customers, or even 100 customers, or 50 customers that each share that with another 500 people and you do this effectively, your business could go through the roof, and it’s all done through Facebook messenger, without leaving Facebook Messenger it’s wild.