What is CAC and Why Should I Care?
Well let’s first define it, CAC is the customer acquisition cost also referred to as COA, cost of acquisition is a metric that measures the cost of acquiring a new customer for your business. OK, that makes sense right? Whatever acronym you use, you are determining how much did I pay to get that customer? If your answer is “I don’t know.” then that’s a problem because how will you know if you are making money? Or how much you are losing and how to fix it.
CAC can include a variety of costs, such as advertising and marketing expenses, website development and maintenance costs, and sales and customer service expenses. Let’s just keep it simple and say you are advertising on Meta/Facebook and running ads. The ads are your only marketing expense. You spend $200 a day and get 2 sales. That means your cost of acquiring a customer is $200 / 2 or $100 a customer.
Is that good or bad? That depends on what you are selling. If are you selling $1,000 mattresses that could be pretty good but if you are selling $20 glasses set that is not great at all. For the mattresses, you made $900 on each sale and for the glass set you lost $80 on each sale.
Let’s assume this customer never buys from you again. There are products where the customer will come back again and again which will factor into LTV or long-term value of a customer but we are focused on money in TODAY! Well, you may be tempted to say, OK but then I will acquire another customer for $5 to even things out but it doesn’t really work that way. There are ways to continue to optimize and improve your cost of acquiring customers via paid ads but that will not happen overnight. It’s a longer blog post on the ins and outs of Facebook paid ads, but in short in the example, if you are selling glass sets you have a big problem.
CAC is important to track because it helps you understand how much it costs to acquire new customers and whether your marketing and sales efforts are generating a positive return on investment (ROI). By comparing your CAC to your customer lifetime value (LTV), you can determine whether your business is generating enough revenue from each customer to cover the cost of acquiring them.
There are also a whole bunch of other costs for the business that will eat into that $900 you made on the mattress to determine overall profitability but for now we are focused on marketing spend in this blog post.
By tracking your CAC and comparing it to your LTV, you can make informed decisions about your marketing and sales efforts and ensure that you are generating a positive ROI from your customer acquisition efforts.
Confused or need a full audit of your finanicals? No problem we are here to help and can figure out how to improve your ad spend, lower your costs and find a path towards profitability (assuming there is one, some businesses will not scale and we will tell you that as well.)
