Find out how the marketing team can optimize CAC to extract more results in your day-to-day and optimize your investments
Customer Acquisition Cost (CAC) is the result of the sum of investments made in Marketing and Sales divided by the number of customers conquered in the same period. It is an essential metric for measuring a company’s financial health. Marketing managers and entrepreneurs must be concerned with business metrics to make informed decisions.
One of these metrics is the Cost of Acquisition of Customers (CAC), which has been gaining more and more relevance in the field. However, many companies are still not concerned about measuring and tracking this metric, mainly because they are unaware of its importance in decision making.
In addition to being strategically very important for the company as a whole, it ends up being very important for the decision-making and strategy of marketing managers.
The purpose of this post is to demystify CAC, explaining exactly what it is and how to calculate it, but mainly showing how the marketing team can use it to extract more results in their daily lives and optimize their investments.
What is Customer Acquisition Cost
Let’s get straight to the point: customer acquisition cost is the average investment in direct efforts to acquire a customer. In most companies, the areas that act directly in this process are Marketing and Sales, but depending on the business, they can vary.
For example: if your direct investments in customer acquisition add up to R$10,000 a month, and with that, you got 20 clients, your CAC will be R$500.
It is also worth mentioning that the calculation is always made considering investments and new customers acquired in the same period.
The cost of acquiring customers is calculated from month to month, but it is important to consider some sudden variations from time to time. For example, if one month you hired two more salespeople, the CAC should increase, as they are likely not to bring in customers within the first month of work. But with time this value stabilizes again.
How to calculate CAC
The first step is to disregard all areas of the company that are not directly involved in customer acquisition. Some examples are product department, support, administrative, etc.
To demonstrate the calculation Blue World City will use the areas of marketing, sales and new customers over a period of one semester.
- Investments you should consider in marketing: salaries, tools, investments in paid media (buying ads), events, PR and everything else you use to showcase your product, generate leads and opportunities for the sales team;
- The investment you should consider in sales: salaries, commissions, tools, telephony, travel and all the infrastructure used by salespeople to convert new customers;
- New clients: finally, we need the number of new clients acquired in the same period. It is also worth mentioning that if you have customers who were won in other channels not considered in the investment, these should also not be considered in the new customer’s account.
Having this in hand, just apply a simple formula:
CAC = (Marketing investment + Sales investment) / number of new customers
So, to calculate the Customer Acquisition Cost properly, you can follow the 6 steps below:
- Set the period you want to calculate
- Identify all marketing expenses in the period
- Identify all Sales expenses in the period
- Raise the total number of customers conquered in the period
- Add up the expenses and divide the total by the number of customers gained
- Now that you have the CAC value, cross it with other metrics such as Average Ticket, Lifetime Value and ROI
How to use CAC to make better decisions
In addition to indicating whether your business is healthy, this metric can greatly help marketing managers to make strategic decisions and optimize investments. For this it is necessary to review an important concept.
In traditional businesses (punctual sales), the cost of acquiring customers’ needs to be less than the average value of your product/service for your business to be healthy.
This becomes clear when we think about the example below.
If you spend an average of R$500 to gain a new customer and your product costs R$300, you will have a loss of R$200 for each customer you gain. Unless you have loyal customers who buy from you more than once, chances are your business is in financial trouble.
In recurring payment businesses (such as subscription models) this changes a bit. For your business to be healthy, the CAC needs to be less than the LTV (Lifetime Value), which roughly is the average of how much each customer will spend with you over their lifetime.
Example: you have a CAC of R$ 500 and the client pays you R$ 100 monthly. But knowing that your clients spend an average of 14 months with your company, their LTV will be R$ 1400. So, this way it is possible to see that the business is financially healthy.
Based on this concept, we carry out the analyses.
CAC x Lifetime Value (LTV) – lifecycle value
The Lifetime Value or value in the customer’s life cycle refers to all the value added by the customer during the relationship with the company, that is, the money that enters into the contract period. It is a very common metric for companies working on the recurring revenue model.
So with CAC and LTV you create a balance: how much you spent to acquire a customer and how much he will add to becoming a customer. Obviously, our goal is to have the smallest possible CAC and the largest possible LTV.
In many business models, especially the more classic ones, the account is usually clearer: in a very simplified way, the profit will be the revenue minus the costs and expenses – including here the CAC.
In other models, such as SaaS (Software as a Service) the account is usually not so simplified. This is because there will be a cost to attract a new customer and the revenue that this customer brings to the company will not offset the cost in the short term.
Think of a company that has a R$200 CAC to sell a product for R$50/month. To reach the break-even point, the customer needs to spend 4 months paying the subscription for the company to start getting financial returns.
In both cases, with or without recurrence, it is important to keep this relationship in mind to understand that it is not enough just to make a sale to generate profit. In fact, there is a lot of research showing that it is cheaper to keep a customer active and make new purchases than to acquire a new one.
Whether in the subscription market or selling products, there are several techniques that help in this goal of keeping a customer in the long term. Some of them are: pricing, sales (cross-selling, upselling, etc.), customer service, after-sales and Customer Success.
Finally, a good growth engine must act on three fronts:
- Decrease CAC, investing in acquisition strategies that enable scalability and predictability in the medium and long term, such as Inbound Marketing and more efficient sales strategies and processes;
- Reduce the time to reach the breakeven point ( break-even point, when the investment made by the client exceeds the cost of attracting it), mainly by reducing the CAC;
- Increase lifetime value by investing in retention practices, Customer Success and other strategies to keep the customer longer.
How marketing can take advantage of CAC to analyze and optimize your investments
1. Comparing with LTV (recurring payment) or Average Ticket (one-off sales)
If the CAC is higher than the LTV or average ticket, something needs to be optimized: cut expenses to reduce CAC, increase results or work on retention and loyalty actions.
The marketing manager can then analyze which of their investments is bringing less return and reduce them, but mainly, try to increase their efficiency in order to bring in more customers.
In the latter case, Marketing Automation is something that can help a lot. The basic premise is to automate multiple Digital Marketing efforts to deliver much more results with less effort. This has a very big impact on CAC.
If the CAC is much lower than the LTV or average ticket, we have a strong indication that actions and investments are being very efficient.
This is indeed an excellent indicator, but it deserves attention because in this context your company may be wasting great growth potential. If I invested a little more, I could grow faster and faster without compromising the company’s financial health.