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Customer Acquisition Costs (CAC), Customer Lifetime Value (CLTV), Breakeven (BE) and Marketing Efficiency Ratio (MER)

Customer Acquisition Costs (CAC), Customer Lifetime Value (CLTV), Breakeven (BE) and Marketing Efficiency Ratio (MER)

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Published by Ed Soehnel
This article discusses how to use 4 key metrics in direct marketing for a consumer product business.
This article discusses how to use 4 key metrics in direct marketing for a consumer product business.

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Published by: Ed Soehnel on Oct 05, 2010
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09/28/2011

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Tutorial 
By Ed Soehnel 
Customer Acquisition Costs (CAC), Customer Lifetime Value (CLTV),Breakeven (BE) and Marketing Efficiency Ratio (MER)
This article will discuss 4 key metrics in direct marketing for a consumer productbusiness. Those metrics are breakeven (BE), customer acquisition cost (CAC),customer lifetime value (CLTV) and media efficiency ratio (MER). The latter is anindustry term most commonly used in direct response TV and radio media, but I findit helpful for any form of direct marketing and like to refer to it also as “marketingefficiency ratio”.Calculating these metrics is fairly straightforward in principal, certainly more difficult inaction. BE can be reported in many different ways, from breakeven marketing spendto breakeven net income and more I will use BE as a ratio of revenue divided bycosts, which is also MER. CAC is operating costs of the business divided by thenumber of customers. CAC may also be called cost per order (CPO). This metricshould be calculated weekly for TV, radio or other forms of recurring media spendsand by event for specific marketing activities, such as purchasing an email list. It isyour total costs divided by total customers. CLTV is average revenue per customer over the lifetime that that individual will remain a customer. MER is your revenuedivided by your costs. It is represented as a whole number to the 10
th
or 100
th
decimal place. For example, if your marketing spend in a week is $50 K, and your revenue is $110 K, your MER is 2.2. Breakeven MER means that your costs at agiven marketing spend (marketing spend is included in costs) are equal to your revenue. I will leave the details about using the proper assumptions to calculatethese metrics for another article.CLTV can be used a couple of ways. Its useful for determining your product’s ability toplease a customer such that they return to buy more. If you sell an ingestibleproduct and your CLTV is equal to or close to the average revenue per firstpurchase, then customers are generally only buying once and not returning. If theaverage time period in your industry to retain a customer is 6 months and you sellthem a 3 month’s supply, then you may have a problem because customers are notreturning to purchase more. You might fix this by either getting your customers tobuy a 6 month supply on first order, so at least you extract the maximum value outof them as possible, or you might go back to product development to work on thefeatures and benefits of your product to increase its appeal and utility to customers.The former is a short-term fix, while the latter is a fix that could bode well for thelong-term sustainability of your business.Second, the CLTV helps you understand the profitability in your business and where youhave margin to spend. For example, you breakeven at a $60 CAC spend week in andweek out; that is, you can spend $60 each week to acquire each customer andbreakeven on the P&L of your business. Your CLTV is $100, which means that youacquire an additional $40 over time from that customer; so, the customer spends$60 on first purchase and over time, comes back and spends an additional $40 for atotal CLTV of $100. You could use some of those profits at times to boost marketingexpenditures to acquire future revenues. Lets say you boost your CAC to $80. Your are now unprofitable by $20, but you will make it up with an additional $20 over timefrom that customer. Your short-term P&L suffers, but profitability in the future isincreased.The problem with CLTV is that you cannot get an accurate figure of your CLTV because itrequires sufficiently reliable operating history and is constantly changing. Youcould limit the time period for calculating your CLTV. For example, 12 months maybe a rule-of-thumb baseline period for including the revenue you receive from a
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