What if you could know which customers to pursue, and where best to invest your SMB’s marketing budget?
Customer acquisition cost (CAC) and customer lifetime value (LTV) can help answer those questions.
These metrics can help your SMB determine what it costs to acquire new customers and how much value they generate over time.
More than that, you can use CAC and LTV to compare marketing channels, identify opportunities to improve returns, and decide whether increasing your customer acquisition budget makes financial sense.
Below, we walk you through calculating and interpreting CAC and LTV for your small business, and explore how alternative financing can help you fund customer acquisition and support growth.
CAC and LTV: Two Metrics for Smarter Customer Acquisition
Whether you’re acquiring customers through organic marketing or paid advertising, you need to know which initiatives are delivering results.
CAC and LTV help you assess the financial impact of those efforts:
- Customer acquisition cost (CAC) measures how much you spend, on average, to acquire one new customer.
- Customer lifetime value (LTV) estimates how much revenue a customer generates over the course of their relationship with your SMB.
However, looking at each metric on its own doesn’t provide the full picture.
After all, a low CAC may seem great, until you consider that customers only purchased one time and never returned. Likewise, repeat customers who spend more over time may cost your SMB too much to acquire.
To best understand whether your customer acquisition efforts are paying off, it’s important to compare both metrics.
First, let’s explain how to determine your CAC and LTV separately.
Calculating Customer Acquisition Cost (CAC) for Your SMB
The basic formula for calculating your SMB’s customer acquisition cost is:
CAC = Total sales and marketing costs ÷ Number of new customers acquired
So, if your SMB spends $4,000 on sales and marketing within a month and acquires 50 new customers in that same timeframe, your CAC is $80.
It’s important to note, however, that the accuracy of your CAC is highly dependent on the information you use to calculate it.
Ideally, your sales and marketing costs should correspond to the customers acquired during the same period. Granted, the timing won’t always line up perfectly, as some customers take longer to convert than others. Be sure to bear this in mind when interpreting your results.
Step 1: Figure Out Your Overall CAC
Start by identifying the costs associated with attracting and converting new customers. Depending on your business, these might include:
- Paid advertising on Google, Facebook, Instagram or other platforms.
- Marketing software, email platforms, and customer relationship management (CRM) tools.
- Freelancers, agencies, and other external marketing services.
- Sales team salaries, commissions, and related expenses.
- Sales tools and lead generation services.
- Any indirect costs, like overhead.
Choose a consistent reporting period, such as one month or one quarter. Total the relevant costs from that period. Then, divide that number by however many new customers you acquired.
Step 2: Track and Compare Your CAC by Marketing Channel
Your overall CAC provides a useful starting point, but it doesn’t tell you which channels are getting the most traction.
To do this, calculate the costs and number of new customers associated with each channel.
Consider a local house cleaning business that wants to attract more regular clients. Across one month, the SMB owner spends:
- $3,000 on YouTube ads, bringing in 40 new customers (CAC of $75 each).
- $750 on a LinkedIn ad, generating 25 new customers (CAC of $30 each).
- $500 on an email campaign, reeling in 10 new customers (CAC of $50 each).
The owner now knows two things:
- They have spent $4,250 to acquire 75 new customers in one month, for an overall CAC of approximately $56.67 ($4,250 ÷ 75).
- LinkedIn is delivering the lowest CAC, followed by email and then YouTube.
For simplicity, this example assumes each new customer is attributed to one channel, with no overlap between channels.
Based on these results, the owner might decide to increase their LinkedIn ad spend, to test whether they can acquire more customers at a similar cost.
Step 3: Boost Spending and See What Happens
SMB owners often assume their current CAC will remain the same as they increase their marketing budget. However, your CAC may actually change as you boost your spending.
Let’s say the same house cleaning business from Step 2 spends $1,000 on a one-month Google Ads campaign that directs people to a landing page, and 40 new customers make a purchase during that period. The CAC for that campaign is $25.
The business then decides to spend another $1,000 and run that same campaign the following month, acquiring another 10 new customers. The CAC for the second month is $100.
Across both months, it cost $2,000 to acquire 50 customers, which means the SMB has:
- An overall CAC of $40 ($2,000 ÷ 50), showing the average CAC across both months.
- An incremental CAC of $100 ($1,000 in additional ad spend ÷ 10 additional customers), showing how much it cost to acquire each additional customer during the second month.
Measuring incremental CAC can help assess whether expanding a campaign is still worthwhile, even when overall CAC looks reasonable. So be sure to track both numbers.
If incremental CAC goes up considerably, it may be necessary to switch tactics—like refining targeting or testing a different channel before investing more.
Calculating Customer Lifetime Value (LTV) For Your SMB
Knowing your CAC is only half the picture.
To truly assess whether your customer acquisition efforts are paying off, you also need to know how much money each customer will generate for your SMB over time.
The basic customer LTV formula is:
LTV = Average purchase value × Purchase frequency × Average customer lifespan
Below, we explain how to calculate LTV and use it to make more informed customer acquisition decisions.
Step 1: Calculate Your Revenue-Based LTV
Consult your records—including sales, invoices, and point-of-sale reports—to first figure out the following. If you don’t have enough historical data, start with reasonable estimates and refine the math as you collect more information:
- Average purchase value: Divide your total sales revenue by the number of purchases during a given period. For example, $10,000 in sales across 200 house cleaning appointments in one quarter gives you an average purchase value of $50 within that timeframe ($10,000 ÷ 200).
- Purchase frequency: Divide the total number of purchases by the number of unique customers during the same period. So, if 100 customers book 300 cleaning appointments in a year, they average three purchases each (300 ÷ 100).
- Customer lifespan: Estimate how long customers maintain a relationship with your business. For example, a house cleaning SMB may determine that most clients stick around for two years.
Once you’ve done the math, multiply your numbers to estimate your revenue-based LTV.
Using the numbers above: a $50 average purchase value, three purchases per year, and a two-year customer lifespan produce an estimated LTV of $300 ($50 x 3 x 2).
Step 2: Subtract the Costs of Serving Your Customers
The LTV formula above estimates how much revenue a customer generates over their lifetime. But it’s also important to remember that some of that money needs to go toward the costs of delivering your products or services.
Building on the example above, let’s say the house cleaning SMB’s customer LTV is $300, but it costs $120 in supplies and labor to serve that customer over their lifetime.
Subtract that $120 in service costs from the $300 LTV, and the business is left with $180—money that can be used to help pay for customer acquisition and other expenses.
Step 3: Refine Your LTV Estimates Over Time
As your business evolves, review and update your LTV calculations to ensure your estimates reflect current customer purchasing patterns.
To get a clearer picture of lifetime value, look beyond overall LTV and compare different customer groups.
For example, you may find that customers acquired through email make repeat purchases more often than those acquired through YouTube advertising, resulting in a higher LTV. To ensure you’re making meaningful comparisons, assess similar groups over equivalent timeframes.
Ultimately, these insights can help you decide which types of customers to prioritize, and where to invest your marketing budget for the greatest long-term value.
Comparing CAC and LTV to Assess Growth Opportunities
Let’s return to our house cleaning business, which has a customer acquisition cost of $56.67 and an estimated customer lifetime value of $300.
After spending $120 to serve each customer and $56.67 to acquire them, the SMB has $123.33 remaining per customer ($300 – $120 – $56.67).
This suggests that the business is bringing in enough revenue from each customer to cover the direct cost of serving them and the cost of acquiring them. With $123.33 left over per customer, the SMB now has money to put towards other operating expenses—and potentially toward future growth.
If you want to know if your own customer acquisition strategy is working, look at whether the value that customers generate over time covers the direct cost of serving them and the cost of acquiring them, with enough left over to contribute toward other expenses.
Then, as you increase marketing spend, track whether the cost of acquiring each additional customer rises and whether those customers are still expected to generate enough value to justify the investment.
If the numbers look promising, you likely have a good foundation for reaching more potential customers and pursuing growth opportunities.
Funding Your Next Stage of Customer Acquisition
At this stage, you may be considering investing more in your customer acquisition efforts.
The challenge? Marketing expenses often come before people start buying. Meanwhile, using all your available cash to fund growth can leave less money for your day-to-day operations.
Thankfully, alternative financing offers an SMB-friendly way to boost spending while preserving working capital for all your other business needs.
Through Bitty, SMB owners can access fast funding with flexible repayment options to suit their business needs:
- With revenue-based financing, eligible businesses receive a lump sum in exchange for an agreed-upon repayment arrangement tied to monthly sales.
- Meanwhile, fixed-fee business loans offer a different payment structure, with a set financing fee established in the terms.
By taking advantage of these options, you can easily fund your next marketing push when your CAC and LTV estimates indicate an opportunity for SMB growth.
Make Customer Acquisition a Growth Opportunity for Your SMB With Bitty
When it comes to acquiring customers, every dollar should have a purpose.
Regularly tracking your CAC and LTV can help you direct your marketing budget where—and when—it has the greatest potential to deliver value.
When the numbers point to opportunity, having access to capital can help you take the next step.
That’s where Bitty comes in, helping you fund your customer acquisition strategy without draining your cash flow and depleting the working capital you need to keep your business running.
And with eligible SMBs often receiving funding in as little as 24 hours after applying, you may be able to jump on opportunities much sooner than you think.
Reading to put your growth plans into action? Contact Bitty today to explore financing options that align with your business needs.
