![]() Retailers tend to use advanced methods for calculating CAC because customer lifespans tend to be longer and the average spend tends to be shorter. Now imagine the company spent $1000 on marketing and related expenses last month, and acquired five customers, making their CAC $200.Īrmed with these two figures (assuming the LTV doesn't change), we can infer that the profitability per customer is $1000.įor other types of business, there may be better ways to work out the total value of a customer over their time with the company or product. Now, every month, their customers pay them $100 on average, which means that over the lifetime of the customer, they will hand over an average of $1200. Let's imagine a SaaS business which keeps its customers for 12 months, on average. If you want more information on calculating LTV, we recommend the ChartMogul Ultimate Guide to SaaS Customer Lifetime Value. or LTV or CLTV).įor SaaS businesses, LTV looks like this: Now the CAC calculation becomes more complicated because we have to work out the value of the customer through their entire life (known as lifetime value or customer lifetime value. That's a thinner margin than we may have assumed on weekly revenues of $150,000 – because of the high CAC, her weekly profit is just $5000.īut for most businesses, people will buy more than once – either by visiting a store repeatedly or paying monthly on a credit card (as is the case for SaaS businesses). ![]() However, to keep up that flow of car-buying customers, the dealer is spending $25,000 on newspaper ads every week.ĭividing that $25,000 by the ten customers means her CAC is $2500. Let's imagine an auto dealership that sells ten cars a week, and never sees any repeat business.Įach car costs $15,000, and the profit the dealer will make on the vehicle is $3,000 – giving her a gross profit of $30,000. That's why you should pair CAC with LTV (and why we did above) – it's a measurement of profitability.įor many businesses, this might be very simple – if you sell cars, for instance, people will buy very infrequently and so the total value of that customer is probably just the profit on one car. To build a viable business, your revenue from a customer MUST exceed the money that you spent to acquire that customer. Why customer lifetime value (LTV) is important In our calculator above, you'll see that we've asked you to sum most of the core inputs into the CAC formula, but you could easily split out CAC by channel by dividing the total amount you spent on a single channel by the number of customers it produced. This simple explanation illustrates the customer acquisition cost formula, which looks like this: Spend $100 on PPC and $50 on mailed flyers and end up with two customers? Your CAC is $75 ($150 / two customers). ![]() Spend $100 on Facebook to get your first customer? Your CAC is $100. The AMOUNT you'll have to pay, at the most basic level, is your CAC. Whatever method you choose, you'll have to pay for it (yes. That payment could take any form it could be advertising on Facebook, buying ads through Google AdWords, sending out flyers to peoples' letterboxes or standing on a street corner trying to sign them up. That means getting customers – and usually, you'll have to pay to get those customers. If you've got a product, you need to sell it. Why pay attention to CAC (and how to use the formula) If you want to understand how to do this for yourself (with more accuracy), read on. The CAC calculator above will give you a framework for working out a rough number for your business. And you'll be on a fast-track to success. We can all agree that there are a lot of metrics to measure running ANY business.īut listen, customer acquisition cost (from here, 'CAC,' because let's face it, it's a mouthful.) is one of the most critical metrics out there.įail to understand it, and your business will sink. How does customer acquisition cost (CAC) work?Ī look at some of the principles behind CAC, CLV, LTV and all those other acronyms. ![]()
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