The Customer Acquisition Cost (CAC) is the cost to acquire an average customer. If it is significantly lower than how much money you can earn from one customer (Life Time Value), your unit economics will be positive and the company will be more likely to drive a sustainable net profit.
At a minimum, you must include all direct advertising expenses, and you may also include marketing-related salaries for greater accuracy. What exactly goes into the CAC depends on your industry however
CAC Formula in e-Commerce:
User Acquisition Cost / Conversion Rate = CAC
A user, in this case, is defined a somebody who enters your website but does not necessarily make a purchase, or someone who downloads your app and opens it to do a little window shopping but does not necessarily make a purchase. A translation of this formula for an app business could read as follows:
Download Cost / Conversion Rate = CAC
The conversion rate is defined as the user to customer conversion rate. But what’s the exact difference between a customer and a user?
A customer is also a user, but does, of course, make a purchase. Please note that this definition means, that whenever you look at user data, the figure also includes customers. If your analytics data excludes customers from users, you would have to add them together to make the formulas on this page work.
CAC Formula in SaaS Direct Sales:
In the case of a business that requires actual sales reps on the ground, your CAC might be entirely salary driven and you then divide the salary expense by the number of subscriptions your sales reps have sold. To make this figure meaningful you of course need to pick monthly data, i.e. monthly salaries and monthly number of new subscriptions.
Salary Expense / No. of SaaS Subscriptions per month = CAC
It is worth noting that in many businesses there is tremendous levy over what goes into your CAC. For starters, CAC is not an audited figure, hence there is no legal requirement to stick to a specific definition. Additionally there may be more than one definition for sales success. E.g. you might have sales reps selling monthly and yearly contracts, with yearly contracts potentially being priced differently then monthly contracts. And what does salary include? Does it include only the fully onboard and trained sales staff and their sales? Does it include the sales manager who could also manage then times as many sales executives as currently have been hired?
Accuracy vs. Managing CAC expectations
What exact components to include is however a point for discussion, as under certain circumstances only the direct advertising costs increase, while a relatively small marketing team might operate large budgets without adding further employees. So, you might want to focus on the variable components only. This thought leads us to the greater question of, should you actually include as many costs into your CAC to be absolutely conservative or should you focus only on the main advertising drivers to keep the CAC small?
Two considerations in this regard:
- Include all costs to analyze the dynamics of your business in the most conservative way
- Only include scaling variable costs to optimize your presentation for external parties.
See, defining what goes into your CAC is a judgment call at best and investors expect you will present your data in a favorable manner anyways, so as long as you are not misleading them, it’s a fair thought to present a lower CAC. However, you must not make the mistake of starting to believe in your own lies so to speak. You will likely present your CAC to at least your core team members and if everybody works with an understated CAC this may have really bad consequences on how you actually manage your business. So, weigh your options carefully.
Now, let’s have a quick look at an example for an app based hotel booking business: Imagine you pay 5 dollars to convince somebody to download your app, and then 10% of your users convert into paying customers and 50% of these customers stay with you in the long run, then your CAC for your average customer is calculated as follows: First, by dividing the 5 dollar download cost with the 10% conversion rate, you determine that every first time customer costs you 50 dollars to acquire. Secondly, to get the CAC of an average REPEAT customer, you further divide this figure by another 50%, which amounts to 100 dollars, as you need two customers to generate one repeat customer.
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