I wanted to share a story that involves our company being hired as consultants for an online pharmacy generating a whopping 2 million annually.
When we started working with them, we were astonished to discover that they were missing critical information, such as their Customer Lifetime Value (CLTV), target Overall Cost Per Acquisition (CPA), and target New Customer Cost Per Acquisition (NC CPA).
This lack of insight had caused them to plateau and miss their revenue targets for the past two years.
The first thing we did was urge them to gather the necessary data: revenue breakdown between existing and new customers, CLTV for the last 12 months, and the percentages of new monthly customers versus returning customers.
It took them one month to gather this information.
To provide some guidance, I’ll outline the formulas for calculating the following metrics:
CUSTOMER LIFETIME VALUE (CLTV) FOR THE LAST 12 MONTHS:
CLTV is a key metric that estimates the total value a customer brings to your business over their lifetime.
To calculate the CLTV for the last 12 months, you can use the following formula:
CLTV = (Total Revenue from Existing Customers + Total Revenue from New Customers) / Total Number of Customers
TARGET OVERALL CPA BASED ON 90 LTV:
Target Overall CPA represents the maximum amount you can spend to acquire a customer while maintaining profitability.
To calculate it based on a 90 LTV, you can use the following formula:
Target Overall CPA = 90 LTV × Desired Profit Margin
TARGET NC CPA BASED ON 90 LTV:
Target NC CPA focuses specifically on the cost of acquiring new customers.
To calculate it based on a 90 LTV, you can use the following formula:
Target NC CPA = Target Overall CPA × Ratio of New Customers to Total Customers
The ratio of New Customers to Total Customers represents the percentage of your customer base that consists of new customers.
It took our client approximately one month to gather and analyze the necessary data, define clear targets for CLTV, overall CPA, and NC CPA based on a 90 LTV.
And guess what? In the past five months, they have consistently hit their sales targets!
This demonstrates the power of data-driven decision-making and setting clear targets.
By understanding their CLTV, revenue, and breakdown and implementing the correct formulas, our client was able to turn their business around and achieve decent growth.
Have you encountered similar situations where a lack of data hindered business growth?
P.S. The formulas provided are simplified examples, and there might be additional factors to consider depending on your specific business model.
I hope this brought you some value.
Thanks for reading.