How can you use the Customer Acquisition Cost model to make more cost-effective decisions?

1 What is CAC?

CAC is the total cost of marketing and sales divided by the number of new customers acquired in a given period. For example, if you spent $10,000 on marketing and sales in a month and acquired 100 new customers, your CAC would be $100. This means that you spent $100 to acquire each customer. CAC can vary depending on the type of business, the industry, the product or service, and the marketing channel. Generally, the lower the CAC, the better, as it means that you are spending less to acquire more customers.

2 How to calculate CAC?

To calculate CAC, you need to identify and track the costs and the customers that are related to your marketing and sales efforts. The costs include all the expenses that are directly or indirectly associated with acquiring new customers, such as advertising, content creation, website maintenance, salaries, commissions, software, tools, and overheads. The customers include all the new customers that were acquired as a result of your marketing and sales activities, such as leads, sign-ups, registrations, trials, or purchases. You can use a simple formula to calculate CAC:

CAC = (Marketing and Sales Costs) / (Number of New Customers)

Alternatively, you can use a more granular approach and calculate CAC for each marketing channel, such as email, social media, paid ads, or referrals. This can help you compare the performance of different channels and allocate your resources more efficiently.

3 How to use CAC to make decisions?

CAC can help you make more cost-effective decisions by providing insights into the return on investment (ROI) of your marketing and sales activities. You can use CAC to evaluate Customer Lifetime Value (CLV), Payback Period, and Growth Rate. CLV is the total amount of revenue that a customer generates for your business over their entire relationship with you, and it should ideally be higher than your CAC. Payback Period is the amount of time it takes for a customer to generate enough revenue to cover the cost of acquiring them, and you can calculate it using CAC and the average revenue per customer (ARPC). Lastly, Growth Rate is the percentage increase or decrease in the number of customers over a given period, which you can calculate using CAC and the churn rate. A higher CPR, shorter payback period, and higher growth rate all indicate a higher ROI and a more sustainable business model.