We chatted with Diana Kim, Director of Customer Acquisition at ClassPass, about the importance of measuring CAC and LTV in your marketing efforts, as well as best practices for studio and gym owners running promotions.
HOW SHOULD STUDIO AND GYM OWNERS THINK ABOUT CUSTOMER ACQUISITION?
In terms of marketing, the goal is to bring new users through the door and encourage repeat business from your current members. The best way to think through the lens of a marketing professional is to group your customer base into two specific audiences: your new, prospective clients and your existing user base. You want to know the value of your customers (LTV, or lifetime value) and how much you’re willing to pay for them (CAC, or customer acquisition cost). Knowing that you’ll always be investing in marketing, whether through promotions, advertising, referral credits, etc., it’s important to know what your benchmarks are for success. CAC and LTV essentially allow you to measure the success of a promotion or channel and in turn, better strategize on your future marketing efforts.
WHAT IS CAC, AND HOW DO YOU CALCULATE IT?
CAC, or customer acquisition cost, is the cost you pay to acquire a full price client. There are a few different ways businesses can evaluate CAC. For studios and gyms, often it’s most helpful to evaluate CAC for a single promotion or marketing channel as well as across your marketing efforts in a given time period.
In order to calculate CAC for a single promotion, you take the cost of that promotion (your costs as a business to market the promotion as well as any costs to service the class, such as instructor or front desk costs) and divide that by the number of individual consumers who then converted to full paying customers from that promotion.
Cost of the promotion / # of consumers who convert to full-paying customers
To look at an example, let’s assume you offer a free class for new clients that costs you $50 to promote and $50 to host (representing the cost to your business, not the client). If 20 people take the class, 5 of whom convert to full paying customers, your customer acquisition cost for that promotion would be $20, or $100 (the cost of the promo) divided by the 5 new members.
You may also want to know what your CAC is overall for a given time period. To do this, you would need to take a broader approach. You would add up all your marketing costs for a given period, which may include any spend on online ads, search, events, plus the costs of any promotional classes you offered that brought new users to the platform. Then, you would divide this total cost by the number of new users that joined your studio during this time.
Sum of marketing costs / # of new users who joined
Let’s say you want to look at your CAC for the past quarter. We’ll assume your marketing spend for the quarter was $2,000. This may include a Facebook ad you ran as well as an ad you put in the local yoga journal. Then you also hosted 10 free classes for new users that cost $100 each. In total, your marketing costs would be $3,000 ($2,000 marketing spend + $1,000 of free classes). In this time period, let’s say you added 150 new members. Your cost of acquisition would be $20, or $3,000 divided by the 150 members.
While you can’t precisely tie all these new members to the marketing and promos you ran, it is a good proxy for understanding your CAC. This method is technically called “blended CAC” as it takes all your marketing dollars and allocates them across all your new members even if they did not come in through those direct marketing channels you ran, such as the ads on Facebook or ads in the yoga journal. That’s why, with any marketing method you use, it’s good to have a way to track it (such as a unique link or landing page) so that you’re able to use that to measure the efficacy of the promotion and tie back users you acquired to those channels.
WHAT IS LTV, AND HOW DO YOU CALCULATE IT?
LTV then looks at how much a customer is worth to you over the lifetime they are a customer at your studio. You calculate this by looking at the profit you make from that customer over a customer’s lifetime. To calculate LTV, you should calculate the average revenue you make from the users over the course they are with your studio and subtract out the cost associated with servicing them.
Average revenue from user – Cost to service user
To see this in action, let’s revisit our previous example.
Let’s say that in the promotion where 5 users converted to members, on average, over their lifetime as a customer, they bought 2 x 5 packs for $100 each. This means the revenue each customer generated for you was on average $200. From there, we need to subtract out any costs associated with serving those users on an individual basis. If they went to all 10 classes on their packages, you would subtract out the average cost per user per class. You can estimate this metric by looking at the average cost of your instructor per class, divided by the average number of users in a class, then add in any additional costs associated with that user in each class, such as free amenities like towels, water, mats, etc. While the average cost per user per class likely varies from class to class and user to user, for simplicity sake, let’s assume the average cost per user per class is $4 (e.g., if you pay your instructor $60/class and there are ~20 people per class on average, the cost for user is $3, plus an additional $1 for amenities like towels and mats). This means the cost of servicing this user is ~$40 or $4 per the 10 classes he/she takes. This would mean the lifetime value of users from the original free class promotion is on average $160 ($200 in lifetime revenue minus the $40 it costs to service that member).
You would use this same methodology to calculate LTV for any promotion you run and/or for calculating LTV overall for a given cohort of users (e.g., for the ~150 members that joined your studio in the second example).
HOW DO YOU KNOW WHAT SUCCESS LOOKS LIKE?
Now that you know how to evaluate CAC and LTV for a user, it’s important to look at these two metrics in relation to one another. You always want to make sure your CAC does not exceed your LTV for any promotion you run or for your marketing campaigns overall.
Knowing the wide variety of small businesses out there, it’s difficult to put blanket benchmarks in place for what you should be aiming for in terms of your CAC and LTV ratio. That said, a flat LTV:CAC ratio means breakeven (and doesn’t account for operational costs), so you want to aim for something higher. In many subscription businesses, a 3:1 ratio of LTV to CAC is considered healthy—meaning if your CAC is $20, you want LTV to be at least $60. In the example given earlier where CAC is $20 and LTV is $160, your LTV to CAC ratio is 8:1 and would be considered very healthy.
This ratio can also be helpful when comparing the effectiveness of promotions. The higher the LTV:CAC ratio of a promo the better. It’s smart to test different promotions and marketing campaigns to compare and contrast these ratios and better optimize your promotional strategy moving forward.
HOW SHOULD I ACCOUNT FOR CLASSPASS USER CAC AND LTV?
ClassPass is an efficient, low-cost acquisition channel to utilize in your efforts to bring in new clients. There is no marketing cost associated with the partnership, so your CAC in bringing in new ClassPass users is 0. That said, studios and gyms should still consider the LTV of a ClassPass user. To calculate this, look at:
(Your ClassPass Rate – the cost to service) * Average Visits/Month * Average Length on ClassPass
Multiplying the above together will equal your LTV for a ClassPass user. From there, you can focus your goals for ClassPass users the same way you would for your overall marketing efforts: you want to bring new users in the door and then encourage those users to come back and hit their limit every month. (For more information on the number of new users you receive per month and their overall repeat visits for your studio or gym, contact our Partner Success team at firstname.lastname@example.org.)
HOW CAN YOU TRACK CAC AND LTV?
In your promotional efforts, you’ll want to be able to attribute activities to different campaigns and channels, so that anything you distribute digitally can be tracked through website, email, social, etc. A very common free tool that many small businesses use is Google Analytics. With Google Analytics, you can look at site page visits, purchases, and other subsequent metrics through each campaign or channel to help calculate CAC and LTV over a period of time. You can also use your individual reporting tools, such as MindBody, to measure the efficacy of a dedicated promotion or campaign by looking at how many people who purchased a promotion ended up converting to become regular members. You’ll want to measure the whole time frame, considering how many people purchased the promotion, what their usage looks like, and ultimately how many people converted/came back after their promotion period ended so you have the chance to see it full cycle.
WHAT CHANNELS ARE MOST EFFECTIVE FOR REDUCING CAC?
One of the best ways to reduce your customer acquisition costs is to maximize your lower CAC channels such as email and client referrals. Note that controlling for CAC will always work in opposition of client volume, meaning that if reducing your customer acquisition costs is your #1 priority for a certain time period, it will always be at the balance of reduced volume.
As a small business owner, you’re going to want to first focus on your non-paid advertising channels, such as email, social media referrals, or word-of-mouth marketing, as these will be the most cost-effective in terms of CAC. Maximize on that free word-of-mouth marketing by building an email or social campaign that rewards and incentivizes your existing users for referring new clients to your studio. Tapping into your member base ensures you’ll see a higher quality return on investment. For example, at ClassPass we’ve seen much higher conversion on trial memberships through social friend referrals than Facebook advertising. Rewarding your loyal customers turns them into evangelists for your brand, ultimately widening the net for exposure to new clients where someone is much more likely to convert based on the feedback from a friend.
WHAT ADVICE DO YOU HAVE FOR STUDIO/GYM OWNERS ON RUNNING SUCCESSFUL PROMOTIONS?
Promotions work best the longer the term of the promotion is. We’ve seen much more success with extended promotions that cover a longer time period, during which your prospective user develops a habit with your studio or product. A 3 month promotion will ultimately attract a higher quality customer who will contribute to a higher LTV than a 2 week trial customer who may come and go. So instead of limiting the trial/promotional experience to one class (i.e. with a free first class offer), offer a discounted first month promo or class pack. The most generous time frame or class count you can invest, the more likely that customer is going to become a repeat customer.
Evaluating your promotions in terms of CAC and LTV helps you prioritize which are most effective for your company. That said, CAC and LTV are not the only KPIs you should look at to evaluate the performance of your business. You should be evaluating what leads to the best GM and cash position as well. Further, what works for one company may not work for yours, which is why it’s important to practice and test promotions. The great thing about digital marketing is you control your audience and distribution. If you ever feel hesitant about a certain promotion or the creative associated with it, take that opportunity to test it on a small beta group (i.e. 10% of your email list) to see how it performs and take any learnings from that. Maybe you’re not finding the right offer for your demographic, or are hitting someone in the wrong point of their lifecycle as your customer. Check out this statistical significance calculator to help measure the efficacy of a promotion, even with a small test group.
AS WE HEAD INTO THE BUSY FITNESS SEASON, WHAT CAN STUDIO/GYM OWNERS EXPECT IN TERMS OF CAC?
Seasonality will play in your favor as we head into January, with this month being the highest opportunity for conversion with the lowest associated costs as new customers are naturally coming through your doors more than usual. Traditional advertising methods, such as display, radio and print ads, become particularly competitive (i.e. expensive) with the holidays and Black Friday, as you might expect, so start looking into easy, low-cost tools that allow you to control and track activity at your own level of budget and risk. Facebook advertising and Google AdWords are two channels I’d recommend that are self-service and that can be run with any spend or budget level. Both also come with robust data and targeting capabilities which can offer you some really valuable learnings. Check out our step-by-step guide to building a Facebook campaign here.