Making decisions requires a lot of analysis, which can be difficult to do, especially when we are talking about beginning entrepreneurs or those who do everything themselves. However, there are metrics that help on this journey. For example: do you know what CAC is?
Customer Acquisition Cost (CAC) is a metric that needs to be part of the business strategy so that decisions are the best possible. For those who work on the web, it is even easier to measure it, since the platforms provide a variety of data about leads.
Do you want to better understand and be able to leverage the results of your business? We explain the main points about CAC. Check it out below.
What is CAC?
CAC stands for Customer Acquisition Cost – or Customer Acquisition Cost. It is a metric, calculated using a formula, that indicates the average investment a company makes to win each new customer.
CAC analyzes need to assist in decision making by managers. For this, it is important that the calculation result is not analyzed individually. It is necessary to consider factors that may have influenced the result, such as hiring new salespeople.
How to calculate CAC?
The CAC formula is very simple. However, the entrepreneur needs to know exactly what to include in the calculation. Otherwise, the result obtained will be incorrect and the business will work with the wrong metrics.
So, before calculating, write down all the costs and expenses involved in sales and marketing. It is noteworthy that each company will have its own reality, but some of the main ones are:
- Investments in paid media (on and offline);
- Sales funnel tools such as Spark Funnels ;
- Website expenses;
- Trainings, books and courses related to marketing, sales and customer relationship;
- Gifts sent to influencers to promote the brand;
- Sales team salary, if any.
Afterwards, note the number of customers that were resulted from the above investments. It is not to consider those who have arrived by other means, such as the recommendation of friends. After all, the intention is to understand the investment vs. return relationship.
With the numbers in hand, just apply the formula:
CAC = Total investments / Number of customers gained
You might be wondering how often to analyze this metric. There is no specific period. This decision will depend on the strategy adopted by each company. We recommend that it be done in the same period as the analysis of Strategic Planning indicators and other metrics, such as ROI (Return on Investment).
The calculation is usually quarterly or semiannual. It must be remembered that the data used both for investments and for the number of customers must be from the same period of time. If this is not done, the results obtained will be misleading, as they use different bases.
In any case, it is also important that an annual analysis is carried out, as there are acquisitions that will only affect one month, such as the purchase of software. However, your results will be obtained in the following months.
Thus, the investment in month X will only bring a return in month Y. This will greatly influence the result of the CAC, but, if done annually, it is easier for the entrepreneur to have a more accurate picture.
What does LifeTime Value have to do with CAC?
LifeTime Value (LTV) is a metric that measures the average time your customers stay in your business and the amount they spend. The LTV formula is:
LTV = average ticket × average purchases per customer each year × average relationship time
So, LTV and CAC must always be analyzed together. Thus, the entrepreneur will be able to better understand the financial health of the business. That’s because you’ll know how much you invested to win a customer and what the return was. Therefore, the objective is that the CAC is always lower than the LTV.
How to use CAC to make decisions?
CAC vs. LTV
Once you understand the relationship between the two metrics, you need to know how to use them in decision making. Often times, investing in shares to build customer loyalty will be much more beneficial than trying to attract new people.
If the CAC is lower than the LTV, it means your company is making a profit. However, this is not enough to say that the adopted strategy is the best. Evaluate some options:
- Could it be that if I invest a greater amount in customer acquisition, won’t I also have a better return?
- If I change strategy X, can my CAC decrease further and keep the same return?
On the other hand, if the CAC is higher than the LTV, it is certain that it will need to modify some things within the business, because the clients are losing money. So, the analysis must be even more thorough than in the previous case. But there are some main possibilities:
- Rethink customer acquisition strategies;
- Lower costs;
- Invest in lead generation software ;
- Change pricing.
Compare with other companies
Competitive analysis cannot arouse fear. Rather, the activity should be among the pillar activities of your business’ marketing. Several decisions can be optimized if you know the competition well.
So, try benchmarking with other entrepreneurs, preferably in the same industry as you. See what actions were taken and what their results were. Get inspired by major market players — these are companies that often give valuable tips to grow.
Many people will not open up to talk and talk about their own bets and ideas. So, search for yourself. For example, see what prices are in the market and try to understand if this is what is affecting your results.
Knowing what CAC is and how to use it in digital ventures is a valuable step to stand out in the market. It is common for people to “shoot in the dark”, but with Customer Acquisition Cost it is possible to optimize strategies and have better results.