How to come up with a budget:
To figure out how much you can spend per lead to stay at or above a 3 / 1 ratio follow the formula below. You can replace the 3 with a higher number to see what cost per lead you would need to maintain in order to have a healthier LTV / CAC ratio.
You will need to know your:
1. LTV = The total net profit a business expects from a single customer over the entire duration of their relationship, find the average LTV in your business across all customers, account for repeat clients
2. Your estimate / lead ratio
3. your sales %
To figure out how much you can spend per lead to stay at or above a 3 / 1 ratio follow the formula below. You can replace the 3 with a higher number to see what cost per lead you would need to maintain in order to have a healthier LTV / CAC ratio.
Maximum cost per lead =
3 (or whatever ratio you'd like to aim for)
LTV x closing rate x lead-to-estimate ratio
The Numbers Behind My Business
LTV / CAC measures the efficiency of marketing in a business. It measures how much a customers lifetime value (how much total profit they bring in) exceeds the costs of acquiring them
My painting companies LTV / CAC ratio
LTV / CAC = 11.6 / 1
Industry average LTV / CAC ratio for painting companies
LTV / CAC = 3 / 1
What these numbers mean: An average company will put $1 into advertising and get $3 of profit out. My business but in $1 into advertising and got $11.6 dollars out.
LTV / CAC is a ratio that needs to be evaluated once a payroll. This way, you can assess the efficiency of marketing efforts and ensure the money you put in gets real dollars in your pocket.