Step 1: Determine the customer value CLV
What exactly is the CLV?
Customer Lifetime Value : The amount of money an average customer brings in over the lifetime of the business relationship.
Depending on the company's goals, this value can be calculated in different ways. In this article, we will limit ourselves to the simplest method for illustrative purposes.
If customers only make a one-time payment, the average amount is the CLV.
Example: Michael sells eBooks over the Internet. He only has one book on offer and each copy costs 100 EUR. His CLV is therefore 100 EUR.
If a company also works with subscriptions, the churn rate must also be included in this calculation.
Churn rate: The percentage of customers who cancel their subscription each month.
Furthermore, the average monthly turnover that can be expected from each customer must be known.
Example: Every month, 10% of Michael's customers cancel their subscription, so his churn rate is 10%. Access to his eBook library costs EUR 500 per month, so his average monthly revenue per customer is EUR 500.
Here is a very simple formula to calculate the CLV for a company with a subscription offer.
Average monthly revenue per customer / churn rate = CLV
Example: Michael's average monthly revenue per customer is EUR 500. His churn rate is 10%. His CLV is 500/0.1 = EUR 5,000.
Step 2: Calculate available marketing costs
Now that we have determined the CLV, we need to find out how much of this amount can be used for marketing. First, however, we need to find out how much of it still needs to be deducted for ongoing operating costs. These operating costs set the framework for the CPA:
If costs are high, the CPA must be low to still make a profit. However, if costs are low, the CPA can be set higher and you can still be profitable.
Example: Michael has expenses for web hosting, editing, publishing and distribution, as well as his own salary. The total is EUR 2,500 per month. Continuing the subscription example, where his CLV is EUR 5,000, 50% of the CLV must be charged for operating costs.
If he still wants to make a profit, his maximum CPA can be 49.9%, or EUR 2,499.
Aggressive or conservative growth strategy?
A company must ask itself whether profit or growth is more important.
As a reminder, CPA is a percentage of CLV. How much of your CLV are you willing to spend on customer acquisition? If you invest less, the profit will be higher, but the growth will be lower, because the number of customers you can acquire for little money is logically rather low.
Strong growth or high profit?
To determine your ideal CPA, you need to be clear about what percentage of your CLV you are willing to spend on a new customer.
Example: Michael's expenses such as web hosting etc. are 50% of his CLV. He wants to make at least a small profit. He can spend 1-49% of his CLV on customer acquisition and still make a profit - or in numbers, 1-2,499 EUR since his CLV is 5,000 EUR.
Now he has to decide how much he wants to win.
CLV – Operating Costs – CPA = Profit
He's only selling one book right now, so growth isn't really worth it. So profit is more important than growth.
Example: Let's say Michael cares about profit more than growth. He is willing to spend 10% of his average CLV on customer acquisition. Since this is EUR 5,000, his target CPA is EUR 500. This gives him a profit of EUR 2,000 per customer.
But what if Michael wants to grow faster? Then he would have to spend more to acquire a single customer, but he would also acquire more customers.
Example: Let's say Michael cares about growth over profit. He is willing to spend 45% of his average CLV on customer acquisition. Since this is EUR 5,000, his target CPA is EUR 2,250.
5,000 EUR CLV – 2,500 EUR operating costs – 2,250 CPA = 250 EUR profit
This gives him a profit of 250 EUR per customer.
CPA in Practice
But why wouldn't Michael just increase his marketing budget and keep the CPA at 10% of CLV? canada telegram data Unfortunately, there are only a small number of people that can be reached at such a low cost.
Michael knows he needs to increase his CPA to sell more subscriptions, so he gives up some of the profit in favor of more subscribers.
For example, Michael costs EUR 2,250 to acquire via Google Ads, but only EUR 500 to advertise on Facebook. He can only pursue both strategies at the same time if he spends 45% of the CPA. If he chooses the conservative option of 10% CPA, he can only run the Facebook ads.
Stay realistic
Of course, we all want to have the lowest possible CPA and therefore spend as little as possible on customer acquisition. Sometimes you get lucky and a new customer practically falls into your lap. In most cases, however, you have to work for new customers. And that costs money.
Once you know you can only afford a certain amount of marketing, trying out a new channel is a quick way to determine if it meets your target CPA.
Additional CPA Resources
Marketing analytics software helps you identify marketing KPIs and determine what CPA each marketing channel offers.