Understanding lifetime value and customer acquisition cost can result in a massive potential for a lot of experience hosts.
In 2017, I was a guest at a nature center with my girlfriend and friends. We paid around $150 per person for the experience. The following 12 months, I went on the same experience an additional two times. I visited with my in-laws (8 guests) and then colleagues (25 guests). Both times the visit was my suggestion. This resulted in a total revenue of almost $4500 for the nature center.
If we assume the nature center has a margin of 20% I’ve had a total customer value of almost $900. And this is without considering the bookings led by the positive reviews I’ve given the place to other friends and family members.
Today, if I ask the nature center what they’re willing to spend on marketing to acquire a new booking I’m guessing they’ll say somewhere between $15 to $30. I’d like to tell you why that’s a huge mistake and why you should act based on lifetime value (LTV) and customer acquisition cost (CAC) when it comes to marketing your experience business.
How much do you need to spend to create a new booking?
Everyone who runs a business or works with marketing should know LTV and CAC. Understanding these two concepts has a massive potential for a lot of experience hosts. But let’s take a look at the definitions first.
Lifetime Value (LTV) is the average guest’s value over time, for example over a 2-3 year period. Sometimes the term Customer Lifetime Value (CLTV) is used instead.
Customer Acquisition Cost
Customer Acquisition Cost (CAC) is the price you pay to welcome a new guest to your business: In other words the price of getting a new booking.
The real magic happens when you use LTV to budget your CAC. The relationship between the two is called LTV/CAC and it’s this relationship we need to take a look at. Your LTV/CAC tells you what your profit is based on one customer over time - not just at the first booking. For the vast majority of businesses there’s a definitive difference between the two.
Is marketing worth the cost?
Just like a lot of other experience hosts you’ve probably been in a situation where you had to estimate whether a marketing approach is worth the cost.
A consultant recommends that you use the money on Facebook Advertising. A platform wants to promote your experiences by getting a percentage of the revenue. A newspaper wants to sell you an ad. And so on and so forth. There are plenty of opportunities.
But which one is the right one for you? And which ones should you stay away from?
Let me use Mars Space Adventures as an example to explain the benefit of thinking about LTV/CAC.
Case: Mars Space Adventures
Owner: Sandra Saturn
Mars Space Adventures is a fictional experience host who sells trips to Mars.
Their core product is “A weekend trip to Mars”, which costs around $350.
Their costs per guest on an average trip is $300 all together if 10 guests take part. This means that, on average, they have a profit of $50 per guest for each weekend trip. Which means that technically they could pay up to $50 per guest on marketing without losing money.
However, they obviously want to make money off each guest and therefore, they normally go for a maximum marketing spend of $25.
The problem is that it is relatively expensive to market the experience because
- The price is fairly high for the customer
- The trip has a narrow target audience
Mars Space Adventures often end up having to spend a minimum of $40 in CAC, in other words $40 to acquire a new customer through marketing. When they work with platforms they have to add another 20% on top, which means they spend $50 and haven’t made any money on the customer.
So far, it’s been difficult for the owner of Mars Space Adventures, Sandra Saturn, to accept. Therefore, she’s thought of discontinuing the experience several times. It hasn’t seemed worth it and she hasn’t been able to create enough bookings at the right price.
However, it would be disastrous for her business to stop the experience, especially down the line. Why? This is where LTV comes in.
There are other factors to think about when considering whether a specific experience should be kept and in this example it’s fine to spend $40-50 to get a new guest.
Data point 1: Repurchase Rate for private trips
Data source: Sandra’s booking system including statistics module (Holdbar)
The first thing Sandra Saturn needs to consider and analyze is whether the average guest returns to Mars Space Adventures for another experience at a later point.
For instance, Sandra might see that the average customer actually comes back on 2.2 experiences in a 3 year period and it’s especially the weekend trip that creates a high level of customer satisfaction and a high repurchase rate.
This is where it starts to get interesting.
Data point 2: B2B sales created by private customers
Furthermore, Sandra needs to consider whether the average private customer in some cases directly or indirectly creates customers for Mars Space Adventures’ B2B business, for example in the form of group trips.
You often see that private guests are the biggest driver of leads for B2B because it’s often leaders and business owners who are on the experiences in their own time, fall in love with the experience and want to share it with colleagues and employees.
It can be difficult to estimate exactly how much overlap there is but Sandra Saturn might decide to estimate cautiously. For example, that every 20 private guest creates a B2B customer. In a lot of other businesses similar to Mars Space Adventures it’s the B2B trips that result in the highest revenue. There’s often a greater willingness to pay and therefore the revenue per guest has a higher potential.
If Sandra knows that the profit for an average B2B trip is around $1800 then all of a sudden each private guest has an added value of 1800/20 = $90.
The final calculation
A shift in mindset
To Sandra, it was a revelation to start thinking like this. The day after the calculation and conclusion she called the person managing her Google and Facebook Ads and asked to have the max budget increased to $50.
She considered increasing to $80 but she wanted to make sure she wouldn’t end up in cashflow issues since the profit of XX per guest after all happens over 3 years and the costs of the trip will need to be covered right away.
For an experience host like Sandra it can be a revelation to start thinking like this. All of a sudden, she can call the person handling her Google Ads and Facebook Ads and ask them to turn up the marketing budget for each new guest to $50.
She can even consider turning it up to $80 but it’s important to make sure the company doesn’t end up with cashflow issues. After all, the profit of $200 per guest happens over a 3 year period but the cost of the trips needs to be handled right away.
How can you incorporate LTV and CAC into your business from the beginning? It’s essential to have an idea of the guests’ lifetime value - and the only way to get that is through data. When the business is all together in one system it becomes far easier to make decisions like in the example above.