- How to Calculate Customer Acquisition Cost (CAC)
- Comparing Customer Acquisition Cost (CAC) to Customer Lifetime Value (CLV or LTV)
- Customer Lifetime Value is more important than campaign value.
- But, of course, if your Customer Acquisition cost exceeds your Customer Lifetime Value, you may need to bring your CAC down.
- Other Ways to Use CAC to improve your business
What is Customer Acquisition cost: It is a metric used by businesses to measure how much money they are spending to acquire new customers. It is an important metric to track because it can help you determine whether or not your marketing efforts are effective.
In this blog post, we will discuss what CAC is and how to calculate it. We will also provide examples of using CAC to improve your business.
How to Calculate Customer Acquisition Cost (CAC)
There are a few different ways to calculate CAC.
The most common method is to take your total marketing and sales expenses for a period of time and divide it by the number of new customers you acquired during that same period. The customer acquisition cost is a simple formula of total expenditures divided by total customers.
This will give you your CAC for that specific time period.
For example, if you spent $100,000 on marketing and sales in a month and acquired 100 new customers, your CAC would be $1000.
Comparing Customer Acquisition Cost (CAC) to Customer Lifetime Value (CLV or LTV)
Once you have your CAC, you can compare it to your Customer Lifetime Value (CLV or LTV).
Customer Lifetime Value measures a customer’s total value over their relationship with your business. Comparing CAC to CLV is essential because it can help you determine whether or not you are acquiring new customers at a profit.
If your CAC is greater than your CLV, then you are losing money on each new customer you acquire.
You will need to reduce your CAC or increase your CLV to be profitable.
Customer Lifetime Value is more important than campaign value.
Say you launch a campaign that costs you $1000 for $1000 of revenue. This may seem like a losing proposition, or at best, break even.
However, if your Customer’s Lifetime Value is $100,000, the $1000 spent is a bargain. The fact that your marketing efforts break even is even better. So essentially, you are paying nothing to acquire a $100,000 customer.
But, of course, if your Customer Acquisition cost exceeds your Customer Lifetime Value, you may need to bring your CAC down.
There are a few different ways to reduce your CAC:
- Improve your marketing campaigns to be more effective in acquiring new customers.
- Decrease the amount of money you are spending on marketing and sales.
- Increase the number of new customers you acquire.
Improving your marketing campaigns, decreasing your expenses, or increasing the number of new customers you acquire are all ways to reduce your CAC.
Other Ways to Use CAC to improve your business
Use CAC to compare the efficiency of different marketing channels.
For example, if you know that you spent $5000 on Google AdWords last month and acquired 50 new customers, your Google AdWords CAC would be $100.
If you know that you spent $2000 on Facebook ads and acquired 100 new customers, your Facebook CAC would be $20. So, Facebook would be a more efficient marketing channel than Google AdWords, at least in terms of customer acquisition.
CAC can also be useful for comparing the efficiency of different salespeople or sales strategies.
If you know that your sales team generated $100,000 in revenue last month and spent $20,000 on salaries, your sales CAC would be $2000. If you know that your inside sales team generated $200,000 in revenue last month and spent $30,000 on salaries, your inside sales CAC would be $1500.
So, in this example, inside sales is a more efficient sales strategy than your traditional sales team.
CAC can also help you predict future growth.
Suppose you know that your CAC is $1000 and you acquired 100 new customers last month.
In that case, you can expect to acquire 1000 new customers in the next year if you continue to spend the same amount of money on marketing and sales. If you double your sales and marketing efforts, you would expect to earn double the clients.
Of course, this is a very simplified example, but it illustrates how CAC can be used to predict future growth.
Customer Acquisition Cost is an important metric for any business, especially those looking to grow. By understanding your CAC and comparing it to your Customer Lifetime Value, you can ensure that you are acquiring new customers profitably. Additionally, CAC can compare the efficiency of different marketing channels or sales strategies. And finally, CAC can help you predict future growth.
How do I calculate my customer acquisition cost?
Divide the total amount spent by the total number of customers acquired.
WHAT ARE THE TYPES OF CUSTOMER ACQUISITION COST?
There are many ways to calculate customer acquisition costs (CAC), but ultimately it comes down to how much it costs to acquire a new customer. The most common way to calculate CAC is by dividing all the marketing and sales costs by the number of new customers acquired in that period. This gives you your average cost per new customer.
However, this method doesn’t give you the full picture, since it doesn’t take into account the lifetime value of a customer (LTV). The LTV is the total amount of revenue that a customer brings in over the course of their relationship with your company. To get a more accurate idea of your true CAC, you need to divide your marketing and sales costs by the number of new customers acquired in that period, and then subtract the LTV from that number.
There are other ways to calculate CAC as well, such as using a cohort analysis. This method looks at groups of customers (cohorts) that were acquired in a specific time period, and then tracks their LTV over time. This allows you to see how your CAC changes as your customers age.
Ultimately, the best way to calculate CAC is the one that gives you the most accurate picture of your costs and helps you make the best decisions for your business.