What is Customer Acquisition Cost (CAC)?

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What is CAC (Customer Acquisition Cost)?

Customer Acquisition Cost is the cost a business bears to acquire a new customer. It is simply the relationship between the amount a customer pays you and the amount you pay to get the new customer.

This is a mathematical equation. It is how much it costs you to bring a new customer in. This includes marketing costs, onboarding, and providing whatever services you provide.

 

What is Customer Lifetime Value (LTV)?

Customer Lifetime Value (LTV for short) is the total amount of money you get from a customer. There is an average LTV, which is the total of how much the average client will pay you over their lifetime and how long they stay with you (average).

For example, if your average client stays with you for 12 months, and spends $10 per month, then your average customer LTV is $120.

This is an important metric when looking at CAC. The cost to acquire a customer AND fulfill all required services MUST be less than a customer LTV, or you will always be losing money.

Customer Acquisition cost business model

If the amount a customer pays your business is higher than the amount, you pay to acquire the customer, voila! Your company makes a profit. (This assumes that the cost of doing business is less than what a customer pays.)

If you are paying more than your customers do, relax… changes to your business will need to be made in order to reach profitability. In this case, learning how to get traffic for free and a daily marketing checklist may provide value.

Businesses are often founded on great ideas. But even the best plans only go so far. A key contributor to the success of any business is financial management.

It’s no surprise that financial management and success go hand in hand. Making smart financial decisions can make a world of difference in your profit and loss ratio.

Customer Acquisition Costs or CAC determine how fast businesses can grow. CAC also measures the health and stability of growth. Thus it is a key metric every company must know and manage.

CAC helps you:

  • Get a clear picture of how much is spent to convert leads into customers
  • Get an accurate conversion rate (to know how this will help you increase your profits, read on)
  • Project the income a new customer generates minus costs to acquire the customer
  • Calculate your net profits accurately
  • See the actual money your business generates
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Beside CAC, there are a few obvious metrics that help you determine the success of your online marketing model. Some of the most discussed factors are Conversion Rate, Bounce Rate, ROI, ROAS, etc. It’s surprising how many businesses ignore the role of CAC. Are you among them?

Why don’t businesses compute Customer Acquisition Costs?

CAC is a prime metric that SaaS company owners must look into to determine the health of the business. But just like humans tend to ignore their health until they fall sick, business owners tend to overlook CAC until they face a loss or a big drop in profits.

The management of your product and marketing teams often seem to overshadow the significance of CAC.

David Skok mentions on his blog forENTREPRENEURS that,

‘After closely watching several hundred startups that have failed, I observed that a very large number of these had solved the product/market fit problem, but still failed because they had not found a way to acquire customers at a low enough cost.’

Most businesses do not put enough effort towards the efficiency of customer acquisition expenses because the naively believe healthy profit margins are enough. But, once they face a loss and their business is diagnosed with ‘High CAC,’ it’s a scramble to adjust. Trust us; you can avoid this desperate situation. Most businesses do not have a customer acquisition model or a customer acquisition plan. Marketers tend to neglect the inclusion of this KPI when drafting lead generation strategies.

We understand that CAC is not straightforward to calculate accurately, but ignoring it is also not the solution. So, in our next blog, we will provide a simple way to calculate your CAC as accurately as possible. We will guide you through the steps. You enter a few values and get the right calculations you need to avoid CAC disasters.

Would you like help improving your CAC and other metrics?

If you are interested in tracking you exact CAC, Convirza will do that for you. Learn more by getting a free demo today.

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Tanner, Royal, Caden, Jonah, & Syd 4.5.24

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