Key marketing metrics, identifying your MAX CPL through CAC, LTV and ROI

You’ve probably heard about marketing acronyms, you can find these everywhere (SEM, CRM, CMS, PPC, SEO, B2B, B2C, D2C, and an endless etc), there are new popping up all the time. It might seem hard to keep up with them and you might sometimes feel as you´re at risk of becoming outdated or missing out on the new buzz-word.

However, there are a few essential metrics which have some very familiar sounding acronyms. I am pretty certain they have remained relevant since I had heard from them for first time.

The reason being, they have become a standard that we use in the industry and identify some very specific variables that will gives information about:

• The health and performance of our marketing activity.
• The viability of the business model that we are trying to run.
• How much you can afford to acquire a new customer.

I´m going to explain what they mean, how these are connected and how you can build your own model for your startup or future project. Because if you are running a business that operates online you should and will now these metrics by heart.

Filling up your swimming pool

To explain the relationship of these metrics I will use an example, imagine your business is like a swimming pool, water is your cash. Obviously, you want your swimming pool to be filling up.

To keep the water flowing (Revenue) in you need to acquire new customers, this will be the same as saying how much you pay for your water supply or CAC (Cost per acquired customer).

These customer will have a life time value or LTV, these could be translated as the time your water supply will be in good condition and reusable.

Of course hardly any swimming pool is totally watertight and you will have leaks or evaporation, this is what we call churn.

If you want to fill up your swimming pool you don’t want your CAC to be higher than your LTV. Otherwise you won’t be able to fill it up ever. This is what we call ROI or Return on investment.

There is a direct relationship between CAC, LTV and ROI. If you reduce your CAC and increase your LTV you will have a higher ROI.

Identifying your target ROI

A starting point to develop the framework is knowing how ambitious we can be with our business growth and return targets. How quickly you want to fill up your swimming pool.

This will be different for each business and will depend on the stage where the business is at a specific moment in time and the strategy you are planning to adopt, let’s put some examples:

• A startup will have a relatively flexible target ROI in the short term, as the business looks for the revenue model that will make them profitable over time.
• A business focused on growth might not look for positive ROI in the short term as they know it’s a market with big potential and are focused on disrupting and building a brand.
• A consolidated business might focus on high ROI in the short term as the investors are looking to get the money back at a high return in a short period of time.

With this in mind, the first thing to do is to identify what is your target ROI and the payback period.

For the following example I will be using 1.1 target ROI and 1 year payback period. Which are the ones that would give a business sustainable growth. We will look at 3 scenarios that will adjust to the criteria we have used. To get there we first need to calculate our LTV and CAC.

Identify the LTV of your customers

First, identify what is the value of the customers you are acquiring over their life time as a customer.

	LTV	Scenario 1
	Revenue per annum	$24	The average revenue per customer
	Average n of users	24	The average number of users per customer
	Annual revenue	$576	Number of users x revenue
	Lifetime (years)	2	Average number of years you retain a customer
	Lifetime value (LTV)	$1152

Identify the funnel and conversion rates to calculate the CAC

Make sure you´re able to identified the different stages of your funnel and that you are able to measure them. If you need some help finding out these stages I’ve written a few examples you can use as a reference.

In the following example I will use a B2B Saas business example with a 3 stage funnel where media, marketing and sales work together to acquire new customers:

• MQL (Media)
• SQL (Marketing)
• Sale (Sales)

Use the source of growth to understand how much your CAC will be.

	Source of growth scenarios	Scenario 1	Scenario 2	Scenario 3
	CPL	$160	$50	$27.65
	Media > MQL	20%	20%	20%
	MQL > SQL	30%	30%	30%
	SQL Conversion	80%	80%	80%
	Cost per acquisition (CAC)	$3,333.33	$1,041.67	$576.00

In the example above I have used 3 different scenarios, we get 3 different CAC depending on the CPL we are willing to pay.

Identify what is your target ROI

This calculations lead to different payback periods and ROI.

	ROI	Scenario 1	Scenario 2	Scenario 3
	Payback period (years)	5.8	1.8	1.0
	Lifetime ROI	0.3	1.1	2.0

As highlighted previously, your ROI target will depend on your business strategy. But I have given you a clue (in green) of where a sustainable business should be.

Having this model you can now see it´s based on 2 main areas:

• LTV
• CAC

You can develop different strategies that will make your model evolve and compete in the market you operate.

Why is your Max CPL so important after all. It is the amount you are willing to invest to acquire a potential new customer to drive growth. If this figure is too low it is quite likely you won´t stand many chances to get your business started. But don´t throw the kitchen sink out of the window either as being lean is key to survive.

I hope this has been helpful, feel free to download the model I have presented and adjust this to your needs.

Download the free template

What should your next step be?

Use this model and adjust it to your business. Once you´ve find the metrics that you think are achievable it will be time to move one step forward and do your media planning.

You can do this in 2 fold:

• Increasing the number of customers you acquire
• Increasing the value of your your current customers (retaining, cross-selling and up-selling)

If you have specific growth goals use the Source of growth framework to assess where this will come from.

If your growth will come from new customer acquisition, this framework you will give you a Max CPL or Target CPL that you can use as a reference for your media buying efforts.

As a next step planning your media buying, use the channel activation prioritisation framework to decide what the roadmap, tests and budget distribution.

I hope you have found this helpful. Let me know in the comments below if you have any questions.