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How‌ ‌to‌ ‌Get‌ ‌More‌ ‌Profit‌ ‌via‌ ‌Digital‌ Channels.‌ ‌LTV‌>‌CAC‌

28 January 2020

This year Digital ad spending became bigger than Traditional ad spending in the US for the first time. From now on the gap between Digital and Traditional advertising will only grow.

(Source: eMarketer.com)

Naturally, anyone dealing with marketing would want to use digital channels to attract more customers to grow their business. It can be especially profitable for those offering their products or services online be it e-commerce, a mobile game app or a piece of cloud-based software. 

AdQuantum is a mobile performance agency, we help our clients to lead profitable ad campaigns for 4 years. In this article, we want to share our expertise and advise you how to find your way between multiple digital channels and make the right decisions to increase your profit.

Vocabulary

We use a lot of funny words here in digital marketing so let’s agree on their meaning first.

As you can guess the path to success is to maximize your LTV while keeping your CAC low.

The logic is the same as when you buy something at a lower price to sell it at a higher price. In this case, you are buying your customers and they pay you back later.

Rule of thumb:

LTV > CAC

or

LTV/CAC > 1

 

Let’s look into a few examples.

NB: We’ve made up those numbers, none of them are real and serve for educational purposes only. Your real data may be very different, it is fine.

CAC (Customer Acquisition Cost)

Let’s say you have 3 digital acquisition channels: Facebook, Google Ads, and Snapchat. 

There are a few ad campaigns in each channel. Every channel has a different allocated budget and every ad campaign has a different conversion rate. Each channel generates some number of customers.


Img 1

 CAC is a common metric to evaluate traffic quality. Remember, you want to keep it low.

 CAC = Costs / Customers

 Based on the above table, which Channel/Campaign is performing better?

*We presume that the conversion rate will stay the same regardless of the budget.

Let’s see our table after this optimization.


Img 2

It looks a lot better, doesn't it?

For the same spend, we’ve got 56 more paying customers or +34%. The average CAC went down from $55 to $41.

We could stop our optimization at this point and it would be all right, but let’s take a dive further.

LTV (Life Time Value)

There is something else to consider besides how much you pay to bring a customer on board. It is how much the customer pays you. 

Different ad channels have different traffic quality. Users who come from those channels will have different payment habits and spend different amounts of money in your store or app. That’s why we want to add some more columns to our table. 

This is our campaigns data before the optimization.



Img 3

We remind you that your spend (CAC) should not be higher than your revenue (LTV). Don’t run campaigns where CAC > LTV unless you have a very good reason to do it (for example brand campaigns).

Now, let’s see what happened to the profit after our first CAC optimization.

 


Img 4

Now, we will optimize by LTV (and forget the CAC).

 


Img 5

What can you spot?

Profit

As you can see the LTV optimization is a very profitable approach to run ad campaigns with a good profit. 

And, if you want some help increasing your app revenue AdQuantum will be happy to partner with you for traffic. 

Take advantage of our know-how and talk to one of our specialists today!

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