How do you decide if a marketing effort was worth the investment?
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I only measure two things to keep it real simple:
- CAC payback period
- LTV
If my ad spend pays me back within 90 days I’m very happy. If it’s longer than that, I monitor closely.
I also will never let CAC exceed my known LTV. If my LTV sits around $400, I try to keep CAC well under that, unless it’s a new product that I want more feedback on.
This is after 10 years in business though. If you’re strapped for cash, you can’t always pull of that strategy.
If you CAN afford it (ie: you have good cash flow) then “breaking even” on marketing spend can start a positive flywheel and fuel future growth.
This is VERY circumstantial to the business owner’s needs and cash flow.
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In case these acronyms are new to anybody (I scratched my head for some of them from time to time):
CAC - Customer acquisition cost. The average cost to acquire one customer. Your total cost marketing cost and sales spend divided by new customers.
The time it takes for a new customer’s gross profit to cover the CAC would be the CAC payback period.
LTV - Lifetime value for a customer. Pretty much the total gross profit you expect from a customer over their entire relationship with your business.