What Is Customer Acquisition Cost ?
The purpose of every marketer is to help their company to achieve growth. Best marketers don’t just focus on growth are they focus on sustainable growth in the long term. Most of the times marketing professionals forget about the long term part of the growth and just focus on making business decisions to acquire new customers without thinking about the costs.
So how do we think about the long term part of the growth and whether our marketing strategies are efficient or not?
Apart from acquiring customers, you need to look at the costs as well. To track this, you need a metric called customer acquisition cost.
What Is Customer Acquisition Cost
Customer acquisition cost is a metric that covers all the costs of acquiring a new customer. It should contain the expenses such as wages of your marketing and sales people, advertising costs both online and offline, etc. divided by the number of users acquired.
To simply put it, customer acquisition cost is the sum of all your marketing expenses divided by the number of customers gathered.
CAC is a useful metric to see if your growth activities are worth the investment or not. If you are wondering how you can measure the effectiveness of your marketing activities rule is simple;
If your customer acquisition cost is greater than the value you get from a customer then you will be hemorrhaging cash in the long term. At thre end you will go out of the business.
Let’s be clear here I am not saying that having a high customer acquisition cost is bad thing high CAC alone won’t cripple your business if you have a Customer Life Time Value greater than CAC.
Pair CAC with LTV
If you focus too much on CAC, you will be obsessed with the numbers and demotivated to do any marketing activities, and obviously, you wouldn’t want that to happen. Costs should not be looked like a bad thing; instead, they should be viewed as an investment.
Businesses make investments to grow some of these investment decisions are smart and worthy, and some are not so smart and inefficient. There is a way to separate whether your marketing investments are yielding strong returns or not.
Let me introduce you to another essential metric called Customer Lifetime Value (LTV).
Lifetime value represents merely the revenue you generate from any customer on a given period. You calculate the lifetime value from the historical data and generally, the time horizon is 1,3 or 5 years. If you are a relatively new company and you don’t have historical data it could be really challenging to understand this metric. But LTV is an essential metric to keep in your arsenal to help you with the decision making.
LTV/CAC
The reason why we calculate LTV/CAC is to get an answer to this question;
Will the users we acquire generate more revenue than what we spend to acquire them?
You can segment your ads and check your LTV/CAC ratio for each of them and based on this your marketing teams can agree on the maximum allowable CAC for different types of ads and customers.
For example, you could have two different ad campaigns targeted to two different types of personas and maximum allowable CAC could differ depending on the LTV of your target group. Let’s say that your first ad campaign targets enterprise customers with a higher expected LTV. Therefore, CAC could be higher than the 2 ad group which aims the individual customers with lower LTV.
Conclusion
I see that some companies are solely focused on achieving growth, but they forget about the costs. It could be because someone told them “growth is good at any cost” I don’t agree with this mindset because if you are burning cash to achieve unsustainable growth, then your company is doomed to fail. Nothing is infinite especially the cash in your accounts.
Including metrics such as LTV and CAC could sound like a hassle but trust me it’s not that difficult to do. As a marketer, these metrics will help you to make better marketing investments.
If you want to see all your expenses and calculate essential metrics such as CAC, LTV, MRR, etc. you can do all of these in our platform with few clicks.
