CAC stands for cost to acquire customer. In this article, I talk about the different ways in which CAC should be used to inform and improve your marketing efforts and business strategies.
CAC is calculated as ( cost to acquire a customer / # of customers acquired )
This definition of CAC leaves room for relevant adaptation by an organization on:
- What kinds of costs should be considered for CAC calculation?
- digital media, offline media costs?
- Agency costs?
- Ad serving fees?
- Promotion/Offer costs?
- Labor cost?
- Shipping cost?
- How should the # of customers acquired be determined?
- Should you look at new Customers or repeat customers or both?
- Should you rely on web analytics (near real time data) data, advertising platform data or back end data for # of customers acquired?
For the purposes of simplicity and ease of learning, let me talk through a few cases on how CAC can be used, can be calculated and how this CAC can be used in future.
Case 1: CAC calculation for digital acquisition team for a clothing retailer in North America. This team is focused on acquiring new customers through various paid marketing platforms (paid search, paid social and paid display)
| Full Year 2019 | Total | Paid Search | Paid Social | Paid Display |
| Marketing Spend | 1,650,000 | 1,000,000 | 500,000 | 150,000 |
| Orders | 66,000 | 40,000 | 25,000 | 1000 |
| CAC | $25 | $25 | $20 | $150 |
In, this example, we calculated the CAC by each paid channel as well as the overall CAC for all the channels managed by the digital acquisition team. The CAC in the above table gives you the average for the entire year but it does not give you an idea of the fluctuations in CAC that happen through the year during:
- offer days – CACs generally during offer days because offers lead to an increase in conversion rate
- days of heavy competitive activity (brand/promotions/sponsorships/new product launches etc) – competitive activity can increase your costs (CPC/CPM) and lower your conversion rates as people tend to browse/compare more than usual
TIP : Track your CAC across your channels on a periodic basis (for retail – daily, for financial services – weekly etc). This will help you spot disturbing behavior very soon
CAC calculation is heavily dependent on what attribution model you choose to use to assign orders to the different channels you manage. This is a key consideration because it can vary your CAC’s. Most of the organization still rely on last touch attribution model which is the default model for most of advertising platforms and web analytics tools.
Looking at CAC on a periodic basis and knowing CAC on a channel level helps you in the following ways:
- Assess impact of promotions on your marketing CAC – Good promotions will lead to higher conversion rates and lower CACs. Not every promotion will lead to the same result, so tracking CAC over time will give you a good sense of what kind of promotions work the best
- Assess impact of competitive behavior – Advertising world is an auction based model which relies on supply/demand and bidding dynamics. CPCs and CPMs are influenced in every auction depending on who is willing to pay the highest. So, your CACs will fluctuate daily. All else equal, competitive behavior is one of the biggest factors for increase in CAC.
- Assess impact of changes to user experience – In today’s digital world, bad user experience is the biggest reason for
A good understanding of CAC can help you determine:
- Do you have the right budget for the results you are being asked to deliver?
Your boss asks you to deliver 10,000 orders for 100,000 in budget. Based on the CAC calculation earlier, you know that with a CAC of $25 you need about $250,000. This will enable you to determine that this task might be unrealistic, considering the results you have seen so far. And you will be engage your boss and others in a relevant conversation to discuss what would need to happen to hit the goal of 10,000 orders with 100,000 in budget
- What ROI are you driving from your channels?
ROI = LTV / CAC
An understanding of your customer’s lifetime value along with CAC will help you determine ROI. Organizations often struggle with the calculation of LTV.
This is a metric that marketers and agencies are often not very transparent about to the business lines or organizations they support. Smart organizations don’t wait to be told their CAC, they automate all their data collection so they can understand and analyze these metrics.
Smarter organizations take it a level beyond to calculate Customer LTV (CLV), ROAS as well as ROI.
