Introduction to CAC

1. Introduction to CAC

The second half of LTV to CAC is, of course, CAC. So what is CAC?

2. What is CAC?

CAC stands for Customer Acquisition Cost. It is the amount of money a company needs to spend, on average, to acquire a new customer. CAC is a metric many companies have their marketing departments calculate and of course includes money marketing spends. But it can include spend from outside marketing, like salaries for a sales team and rent on stores.

3. CAC formula

For the purposes of this course, we'll just consider paid marketing costs. That means our formula is just total paid marketing spend divided by the total number of new customers.

4. Example: two-touch journey

This seems simple, but can get complicated because of marketing attribution, which we covered in Chapter 1. Let’s say we use first touch attribution and a customer interacted with paid search

5. Example: two-touch journey

and then paid social

6. Example: two-touch journey

before making a purchase. In a CAC calculation for just the paid social channel, would we count that customer? Or do they only count for paid search, because that was their first touch? We'll keep things simple in this chapter and consider costs across all channels equally. But these are questions marketing analysts have to ask and answer.

7. CAC by industry

CAC values also range a lot by channel and industry, but should ideally be as low as possible. For B2C industries like E-commerce and retail, for very efficient and experienced marketing operations, a lower CAC of 20 to 30 USD is common. For other industries, primarily B2B, such as legal services or real estate, they can be in the thousands of dollars. In general, B2B customer acquisition costs are higher than for B2C customers.

8. Marketing spend by industry

A good rule of thumb that applies to both B2B and B2C companies is companies, on average, spend 10% of revenues on marketing. Since that's an average, of course there's some variation; some industries spend a bit more, and other's a bit less.

9. Marketing spend by industry

Industries that tend to spend more than 10% of revenue on marketing include retail, customer packaged goods, and healthcare and pharmaceuticals. Other industries tend to spend under 10% of revenue, such as education, energy, and transportation.

10. What's not in CAC

Email and organic marketing are often not included in CAC. They do have costs - like employees to write and manage content, but they're not included. These types of costs are called "overhead", and they also exist in paid channels too. Overhead are the costs required to launch marketing outside of the cost to run the ad itself. For most businesses, overhead costs are very small compared to the cost of running ads; this is why we won't include them in CAC. But if you're a small start-up just starting your marketing, this might not be the case.

11. LTV/CAC

Now that we have an understanding of CAC, let's build on our earlier review of LTV to dig into the widely-used LTV/CAC ratio. As LTV is a measure of the average customer's worth in terms of revenue to the company, and CAC is a measure of cost, then if LTV equals CAC, the LTV/CAC ratio is equal to 1. More qualitatively, it also means the average spend to acquire a customer is equal to the average revenue a customer is worth. Here's another example. If the average customer lifetime value is $1,000 and the customer acquisition cost is $250, then LTV/CAC is 4. This tells us that, on average, every dollar we invest in customer acquisition marketing yields $4 in revenue over that customer's lifetime.

12. Let's practice!

Now that we've covered the theory, let's get back to exercises.

Create Your Free Account

By continuing, you accept our Terms of Use, our Privacy Policy and that your data is stored in the USA.