CAC, or customer acquisition cost, refers to the amount of money we invest from the time we capture the attention of a potential consumer, until the final conversion. Either because you buy our product, or because you hire our services.
The conversion is not considered to have taken place until the customer pays for the product or service.
The cost of acquisition is calculated by dividing the total expenditure made on marketing and sales by the number of customers converted through that investment.
CAC= Total costs of campaign / new clients acquired in this period
Example of calculation
In this case, we spent 10,000 euros on a Google Ads campaign and acquired 1,000 new clients. The average revenue per customer is £50 and the direct costs of completing each order are £30. Over the years, we managed to retain 75% of customers.
Customer contribution margin: 50€ – 30€ = 20€
CAC: 10,000€ / 1,000 = 10€
CAC and LTV
LTV is the acronym for Life Time Value, or "life value" per customer. The LTV / CAC ratio compares the value of a client over its lifetime, compared to the cost of acquiring it.
This metric compares the value of a new customer over its lifetime in relation to the cost of acquiring that customer.
LTV= (Annual profit contribution per customer * Average number of years that they remain customers) - Initial cost of customer acquisition
If the LTV / CAC ratio is less than 1.0, we are destroying value. On the other hand, if the ratio is greater than 1.0 you may be creating value, but further analysis is required.
Following the example above, we calculate the LTV/CAC ratio as follows:
LTV: 20 ? / (1-75%) = 80 ?
LTV / CAC ratio: 80€ / 10€ = 8.0x
In this case, the proportion is quite high and the company is acquiring customers profitably, assuming that there is not a large amount of fixed cost in the business.
How to reduce CCS
The CAC should be a value lower than the average purchase value of the clients in order to be considered profitable. In general, strategies should aim at obtaining a CLC with as low a value as possible.
- Improving the conversion rate on our website
- Increasing customer satisfaction
- Implementing tools for marketing automation
- Dedicating the marketing budget to the highest performing channels
- Optimizing business processes through a CRM