Next we will turn to Netflix’s customer lifetime value. ![]() A quick look at the price points on the Netflix homepage will show you that the average Netflix subscription costs $11.32 per month which, being the price that Netflix is giving up to provide this free trial, would be Netflix’s CAC in this example. For simplicity’s sake, we’ll pretend those are the only acquisition costs. This free trial represents a portion of Netflix’s customer acquisition costs. One tactic that helped Netflix become such a popular brand was that they made adopting the service a risk free move by offering a one month free trial. To illustrate, it may help to examine the ratio as it pertains to Netflix - one of the most popular media streaming services on the planet. Analyzing this ratio is where you’ll find the real magic behind this metric. This ratio tells the whole story of cash associated with the average customer - from the resources it took to win them over, to the revenue stream their repeat purchases represent. Is a customer worth double what they cost you? Are they worth half? You can find out pretty easily by dividing your CLV by your CAC as shown in the formula below! The CLV to CAC ratio helps us answer these questions by expressing customer lifetime value as a multiple (or a fraction) of customer acquisition costs. When you combine these questions, we can get at the more important question: to what extent is a customer worth their cost? In other words, what is the true value of a customer to my business? Your CLV to CAC ratio asks the question: "What is the true value of a customer to my business?" In other words, CLV answers the question: “how much is each customer worth to my business?” A CLV calculation answers the question: "How much is each customer worth to my brand?" How Do CAC and CLV Work Together?Īs I mentioned, customer acquisition cost and customer lifetime value answer very fundamental questions: The great thing about customer lifetime value is that it allows you to visualize each customer in terms of the total inflow of cash they can be expected to provide to your business. CLV uses a combination of average order value (AOV) and purchase frequency to estimate the average customer’s total value to the brand over the entire time they remain a customer. While customer acquisition cost looks at the value it takes to create a new customer, customer lifetime value looks at the other half of the equation - what happens once you actually have that customer. Whether you’re looking at the cost of free trials that convert new users or the cost of pay-per-click/impression ads on search engines and social media sites, you’ll always be able to answer the most important question: “what does each customer cost my business?” At its core, customer acquisition cost asks the question: "What does each customer cost my business?" This is a valuable business metric because it breaks down the cost of large acquisition campaigns and assesses them on a per customer basis. We’ve already written an in-depth guide on figuring out your CAC as well as a post about the easy way to calculate and improve your CLV, so we’ll keep the explanations fairly simple here.Ĭustomer acquisition cost is a representation of what it takes for your business to bring in a new customer. In order to calculate the ratio between customer acquisition cost and customer lifetime value, you first need to calculate both metrics individually. Combining your store’s CLV with your CAC (customer acquisition cost) allows you to calculate an even more powerful number: the CLV:CAC ratio, the ultimate magic metric. ![]() While CLV is an extremely powerful metric to have in your toolkit, it isn’t the end of the story. One of these magic metrics is customer lifetime value (CLV), which combines purchase frequency, average order value, and customer lifetime to figure what each customer is really worth to a brand. These special calculations are known as “magic metrics,” and working through these calculations is a great way to understand the way your business creates, delivers, and captures value. While there are many numbers that can help inform business decisions, some metrics combine insights from multiple calculations to give decision makers a deeper understanding of what makes their business tick. The thing is, not all metrics are created equal. ![]() Learning to calculate industry metrics is extremely important if you want to grow as a business owner.
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