The CAC metric and other related metrics of CLV and CLV to CAC ratio are used to measure companies’ internal operation and investment in marketing and sales, as well as by investors to assess scalability of recurring revenue business models, especially fast growing internet companies such as subscription-based SaaS companies and e-commerce, web-driven businesses.
The difference between CAC and CPA (cost per acquisition):
CPA measures the cost of an act, such as a click or a signup.
CAC measures the cost of the entire journey to convince a potential customer to actually buy a product or service. This lead-conversion process may result from a blog post, a referral, a workshop or a combination of many long term marketing efforts and short term sales incentives. CAC takes into account your entire sales and marketing spend over a given period of time, and how many new customers acquired in that same time period.
How is CAC calculated
By dividing all the costs spent on acquiring more customers (marketing and sales expenses) by the number of new customers acquired in the period the money was spent.
For example, if a company spent $100 on marketing in a year and acquired 10 customers in the same year, their CAC is $10.00.
Who uses CAC
A company’s internal operation or marketing specialists. They use it to optimize the return on their advertising, marketing and sales investments.
External early-stage investors who use it to analyze the scalability of new Internet technology companies, often with a MRR (monthly recurring revenue) business model. They are usually fast growing e-commerce or SaaS subscription based companies.
How to predict customer acquisition cost
CAC must be measured over a specific period of time, and it must take into account the time it takes for a lead to become a paying customer. Therefore, in predicting CAC, one must NOT check the number of customers acquired at one’s marketing spend for just a given month.
If a business invested heavily on marketing and advertising in January that generated many leads, and these leads became actual customers in April, the CAC for January is not reflecting the true picture. That’s why CAC must account for the average amount of time for a lead conversion. If it takes an average of 90 days from the first marketing touch point to conversion, this 90 day period needs to be included in CAC calculations.
Limitations of CAC:
For businesses and services that rely on nurturing relationships or developing thought-leadership for customer acquisitions over prolonged period of time, through relationship-building (vs. online transactions and subscriptions), using CAC has its caveat.
What can hardly be measured by CAC include but are not limited to: investment on marketing for a new target market over a long period of time, “drip irritation” with organic blog-writing and search engine optimization (SEO), edu-selling that takes lots of customer education before sales, efforts in developing thought-leadership in the industry… all these kinds of persistent long term efforts attribute to client acquisition and the conversion process of which is usually slow. It can be months or years for acquiring and retaining loyal clients who on-board in a later period.
These examples show the difficulty to track and attribute to customer acquisition: If a viral video and/or an outstanding blog establish your expertise and substantiate word-of-mouth referrals, it is very hard to pinpoint at what point a new customer was influenced by exactly what, before becoming your client. If a client found your service from searching online and was impressed by your website content and blog posts, your SEO over the past couple of months or even years should be credited for that customer acquisition.
Often, it is a “symphony” of different instruments working together that attribute to customer acquisition: well-branded website content, regular posting of organic and original blog posts, high quality videos, webinars, word-of-mouth referrals, CRM implementation, networking, strategic partnership, social media marketing and advertising, loyalty programs, customer satisfaction ratings, etc.
CAC varies depending what industry a business is in, what vertical a business is in, and how a business attribute to customer acquisition based on factors such as the purchase lifespan, the sales cycle, and Customer Lifetime Value (CLV).
CLV is based on average purchase frequency, value and customer lifespan.
In Part 2, our next blog post, we will continue to explain about CLV and CLV to CAC ratio.
A2zCFO, both the Right and Left Arms for your organization:
A2ZCFO takes pride in helping small business owners, technology startups and companies plan and measure investment in customer acquisitions to get the most bang out of every marketing dollar. As a consulting CFO, I help business owners and management to “keep your ship on course.”
We help with any aspect of financial management from A to Z. By providing trusted financial advice, I create financial and goal clarity, resulting in increases in cash, profitability and sales all the while preparing the business strategically for a successful exit when the time is right.
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