One of the most frequently asked questions we get as a digital agency is when it makes sense to start digital ads, and after starting, when to increase ad budgets.

The typical approach we see is that people start ads too early, and increase budgets when they start to see sales. But instead, we’ve found the best success after customers understand customer acquisition cost (CAC) and lifetime value (LTV). These metrics directly impact your profitability and inform sustainable growth strategies, regardless of the channel you select.

Why CAC and LTV Matter

Customer Acquisition Cost (CAC) represents the total cost your business incurs to acquire a new customer. This includes all marketing and sales expenses over a specific period, divided by the number of new customers acquired. CAC is a reflection of the efficiency of your marketing efforts. If you are running ads, CAC is directly influenced by your ad spend.

Customer Lifetime Value (LTV)is the total revenue you expect from a customer throughout their relationship with your company. It’s a projection of the value a customer brings over time.

Once you understand how much it will cost to acquire a customer and how much revenue they’ll bring to your business, you can then understand how much you can reasonably spend to acquire them.

CAC to LTV Ratio and Its Significance

The relationship between CAC and LTV is best understood through the CAC:LTV ratio, a key metric for evaluating the health and scalability of your business. A healthy ratio is typically around 1:3, meaning for every dollar spent on acquiring a new customer, you earn three dollars over the customer’s lifetime. This ratio ensures you’re not overspending to acquire customers and that your business model is sustainable.

CAC to LTV And Paid Ads

If you aren’t sure what your customer acquisition costs or lifetime value are before running ads, you run the risk of paying too much to acquire a customer. Remember, paid ads are one of the most expensive ways to get customers, so you want to make sure your business can afford it.

One of the best ways to bring down your CAC is to review your customer journey. What path do customers take from top to bottom of funnel? Are there ways that you can optimize and streamline to save money? Typically, we’ve found landing page optimization the most effective way to address high CAC challenges, as well as reviewing the efficacy of various marketing channels.

Another way to bring down CAC is to ensure that you are clear on your ideal customer profile (ICP). Are you targeting the right people? Are you using the right paid ads channels? Is your copy and creative aligned with what your customers are expecting to see? This takes optimization and iteration, certainly, but a big challenge with paid ads is launching immediately to the right audience in the right place. (Yes, even now with iOS 14 making broad targeting more realistic, its best to be clear on your ICP and how to reach them.)

Conclusion

Starting digital ads without a clear understanding of your CAC and LTV is like starting a hike without a map or compass. These metrics not only guide you in making informed decisions about when and how much to invest in digital advertising but also help in optimizing your overall marketing strategy for sustainable growth. By focusing on improving your CAC:LTV ratio through strategic ad spend, you can ensure that your digital marketing efforts contribute positively to your bottom line.

Interested in learning more about our ads management services? Get in touch.