The subscription landscape is highly competitive. And two of the critical factors of this business model are customer acquisition cost (CAC) and customer lifetime value (CLTV).
Both these are key metrics that need to be in balance for the business to be profitable. And to ensure a balanced CAC vs. CLTV ratio in subscription businesses, you require effective strategies and a deep understanding of how these two metrics work.
If you’re curious to learn about these subscription profitability metrics and how to apply them to your Shopify store, read this blog now!
TL;DR
- A healthy CAC vs. CLTV ratio in subscriptions—1:3 to 1:5—is essential for profitability of subscription businesses.
- To decrease CAC, combine referral and loyalty programs with subscriptions, build communities, offer tiered subscription plans, and combine bundling with subscriptions.
- To increase CLTV, create personalized experiences using data analysis, implement upselling and cross-selling, offer flexibility, and reward long-term subscribers with exclusive perks.
- Track KPIs such as monthly and annual recurring revenue, churn rate, customer segments, and product usage metrics.
- Use analytics platforms like Appstle Subscriptions App to monitor and optimize CAC vs. CLTV ratio for subscription businesses.
Understanding CAC vs. CLTV in subscription business
Let’s get started by understanding the basics of customer acquisition cost for subscriptions and customer lifetime value.
What is CAC in subscription businesses?
Customer Acquisition Cost (CAC) for subscriptions is the cost incurred to acquire a subscriber. In the context of subscriptions, it includes all expenses—marketing, sales, content creation, ad spends, social media spends, promotional discounts, operational, among others—divided by the number of new customers acquired during a specific period.
What is CLTV in subscription businesses?
Customer Lifetime Value is the total revenue a customer generates for a business throughout their relationship with it. CLTV can be calculated by predicting the period for which the customer will remain a subscriber divided by the total revenue they will generate. The revenue can include subscription fees, upsells, cross-sells, and other regular subscription purchases.
Why does CAC vs. CLTV ratio matter in subscription businesses?
The CAC:CLTV ratio determines whether your business is profitable and scalable or not. Let’s understand how and why this ratio matters.
A good CAC:CLTV ratio ensures that the revenue generated from each customer exceeds the cost of acquiring them. This gives a sense of the margin available for operations, growth, and profit.
In subscription models, this ratio becomes critical as subscriptions involve upfront investment to acquire subscribers. Unlike traditional business models where customers purchase products immediately, in subscription businesses, purchases take place over a period of time and repeatedly. While recurring business models increase CLTV, it is also essential to reduce its CAC.
The ratio also impacts businesses’ ability to scale marketing efforts. A good CAC vs. CLTV ratio in subscription provides comfort and confidence to businesses, as they can spend on marketing. Conversely, a poor ratio can hamper growth as businesses might not have enough resources for scale or growth.
What is a healthy CAC:CLTC ratio?
Typically, a healthy CLTV to CAC ratio for eCommerce subscriptions ranges between 1:3 to 1:5. This means, for every one dollar spent in acquiring a subscriber, subscription businesses should earn three to five dollars in CLTV. This ratio provides sufficient margins to cover various costs.
Subscription businesses that demonstrate high performance and have strong retention rates, are often able to achieve 1:5 or better ratios. Businesses that know how to minimize customer acquisition costs and maximize value from each customer relationship often have better ratios.
Key takeaway: Your target CLTV to CAC ratio should be decided based on your industry, product, and business goals. Higher margin products and services subscriptions can often reach CAC:CLTV ratio goals.
CAC vs. CLTV ratio in subscriptions based on industries
The ratios vary based on industries. For instance, the ratio in SaaS businesses is typically between 1:3 and 1:10. Higher ratios can be possible if the cost of providing service is lower, and if the customer lifecycles are longer.
Ecommerce businesses without subscriptions often have CAC:CLTV ratios of 1:4 to 1:6. However, in traditional businesses, the lifetime value calculation differs because of the unpredictable nature of repeat purchases, unlike in subscription formats.
CAC Vs. CLTV in subscription businesses
In this section, we explore strategies to decrease the customer acquisition cost for subscriptions, and to increase customer lifetime value for your Shopify business.
Strategies to lower CAC in subscription businesses
While running organic marketing campaigns and word-of-mouth marketing are some of the strategies that may help acquire customers, to compete in today’s subscription environment, you will have to think beyond these traditional strategies. Here are some strategies to consider:
1. Combine a referral program with subscriptions
A referral program helps increase customers. By combining a referral program with subscriptions, you can increase the potential of new subscribers. Word of mouth advocacy for brands builds more trust and confidence, and hence new customers are more likely to sign up.
2. Combine a loyalty program with subscriptions
Loyalty programs help increase loyalty, decrease acquisition costs, and increase CLTV. Loyalty programs offer benefits, encouraging customers to stay loyal. The more loyalty members you have, and the longer they stick to your brand, the lesser your acquisition costs.
3. Set up tiered subscription model
When the subscription model is tiered—for example, Silver, Gold, and Platinum—subscribers tend to stay more engaged and for a longer duration. For instance, subscribers in lower tiers would want to progress to higher tiers to get more benefits out of their subscription plans. They do so by making more purchases. Tiered subscription models help lower CAC.
4. Combine bundling and subscriptions
Bundles include two or more products or services. When you offer bundles as subscriptions, customers can get more value from it. The convenience of ordering bundles at discounted prices increases customer satisfaction and lifecycle. You can do so by integrating Appstle apps into your Shopify system
5. Provide flexibility
Allowing subscribers to easily change the frequency of subscription deliveries, for example, from weekly to monthly, quarterly, etc., can give them freedom and flexibility, making them stay for longer. When things are not rigid, customers will stay for longer.
6. Build a community
Building a community of subscribers increases the feeling of belonging and being part of an exclusive group of likeminded people. This leads to subscribers turning into brand advocates, and creating a network that attracts more subscribers. This can lead to decreased CAC.
7. Maximize convenience
Design the subscription customer experience (CX) and logistics in a way that it maximizes convenience and minimizes friction. This leads to more satisfied subscribers, flexibility, personalized experiences, and loyalty.
Strategies to increase CLTV in subscription businesses
From meaningful subscription plan pricing to upselling and personalization, here are some effective strategies to increase customer lifetime value in subscriptions:
1. Personalization
With digital subscription tools, you can now collect and analyze customer data, and use the insights for creating personalized experiences for subscribers. Data-driven personalization can help with LTV calculation for eCommerce.
For instance, collect data about subscriber order patterns, behavior and activities on the site, etc., and create offers and recommendations based on that data. When you provide what customers want, they stick with your brand for long, increasing CLTV.
2. Upselling products and services
Another way to increase CLTV is to upsell products and services via subscriptions. Upselling can not only increase the average order value (AOV), but also enhance the value subscribers gain from their orders.
For instance, offer a water tank cleaning service along with the monthly house cleaning subscription. With enhanced value and experience, your customers will tend to stay for longer, increasing CLTV.
3. Flexible subscription plans
By offering flexibility, you can significantly reduce the churn rate of subscriptions. And churn rate is directly connected to increasing CLTV. In subscriptions, you can offer flexibility in many different ways.
For example, flexibility by allowing subscribers to pause deliveries, change delivery dates, add or remove items from deliveries, choose different payment options every time, etc. Allowing them the flexibility to change subscription plans from paid to free to premium, etc., can also increase convenience, satisfaction, and hence, CLTV.
4. Use data-driven insights
When it comes to data, there’s no limit to what you can track online. By analyzing data, you can create personalized and more relevant experiences for customers. And it’s not just past purchases or current behavior you must track.
Track the content that subscribers engage more with, which perks are more liked by subscribers, which tier is performing better, etc. By tracking these and other such, not so obvious data, you can enhance personalization, and increase CLTV.
5. Offer rewards to long-term subscribers
Long-term subscribers often have the highest CLTV. One of the best ways to keep your most loyal customers is to create emotional bonds with them. Do so by rewarding them for their loyalty. Offer exclusive rewards to long-term subscribers on special occasions. For example, mark subscriber milestones with rewards, offer exclusive experiences, or personalized service for them. This will boost loyalty and CLTV.
Tools and metrics for tracking CAC and CLTV
In this section, we explore formulas, calculation methods, subscription tools, and metrics that you can apply in your Shopify business.
Formulas and calculation methods
The formula to calculate CAC is simple. Add all the expenses related to customer acquisition and divide it by the number of customers acquired during that period. Therefore, it is critical to attribute all relevant costs and count new acquired customers properly.
For subscription businesses, customer acquisition cost can include expenses, such as paid advertising, content creation, marketing, salaries, technology, tools and subscriptions, promotional discounts, etc.
For calculating CLTV, you have to take into consideration many variables, for example, average revenue per user, gross margin and customer lifespan, etc. To calculate CLTV, multiple average revenue per user with gross margin and divide by churn rate.
Subscription business KPIs to monitor
Here’s a list of subscription business KPIs you should track. These subscription profitability metrics can help you find gaps in your business, optimize, grow, and scale.
- Monthly recurring revenue (MRR)
- Annual recurring revenue (ARR)
- Churn rate
- Customer segments acquired during a specific period
- Product usage metric
- Customer support ticket frequency
Dashboards and reporting solutions
Ecommerce subscription businesses require efficient, smart analytics platforms that can combine data from multiple sources and analyze it to provide accurate CAC and CLTV. Many advanced subscription tools also provide real-time data analytics and subscription profitability metrics.
Appstle Subscriptions App is a preferred tool used by thousands of Shopify merchants. The app offers integrated reporting solutions that provide subscription-specific metrics. Appstle app can also be customized for specific business requirements.
Wrapping up
A healthy CAC vs. CLTV ratio in subscriptions is key for ambitious and growth-oriented Shopify businesses. A higher CAC and lower CLTV can cause imbalance and have a negative impact on the business profitability.
And to manage and track both these metrics, you require an efficient subscriptions app with the required capabilities.
Appstle Subscription App has built-in features to complement Shopify platform and third-party apps. The app not only helps Shopify and Shopify Plus stores set up subscription plans, but also manage subscriptions to ensure a healthy CAC and CLTV ratio.
Install Appstle Subscription App on your Shopify store today!
