Customer Acquisition Cost
Customer Acquisition Cost (CAC) is the price you pay on an average for Conversion, i.e., acquiring each customer. For example, even Google spent $14.4 billion in 2015 to acquire Paid or Acquired Traffic.
- Beyond Digital Advertisements, CAC also includes spends on Discounts and Promotions, Free Trials, PR, visiting events and conferences, Candid Communication, etc.
Why it matters:
- Without knowing CAC, you cannot know your Unit Economics and LTV and thus if you are Profitable.
- Segmentation by Channels is critical so you can determine if that channel is Profitable. Always attribute CAC and LTV to each channel.
How to calculate CAC?
Establishing exact causality is very hard. To calculate CAC, total your entire marketing cost and divide it by the number of customers.
- It is extremely easy to calculate the cost of Digital Advertisements or Paid or Acquired Traffic. It is calculated in the form of CPM, CPL, etc.
- Calculate the cost of Referral Traffic by determining amount spent on PR, etc.
- Calculate the cost of content marketing by determining the cost of creating Candid Communication and the cost of running your Owned Media.
- Do you provide Discounts and Promotions? Then include those too.
- If you distribute a physical product then include the cost of your distribution partners (wholesales and retailers) and the cost of repurchasing unsold inventory.
- If you have a money-back policy, then include the rate of return too. Alternatively, do not classify customers as acquired till they qualify for money-back.
- If you have a sales team, then include the cost of the sales team and sales commissions.