🔍How to Calculate CAC (Customer Acquisition Cost), And Uncover Hidden Marketing Leaks ⚡

Are Your Marketing Dollars Vanishing? Discover the One Number That Can Save Your Business.

Ever feel like you're throwing money into a black hole with your marketing efforts? You're not alone. Many small and medium business owners struggle to understand if their marketing investments are actually paying off. Imagine having a crystal ball that could reveal exactly where your money is going and how to make it work harder for you. That crystal ball exists, and it's called Customer Acquisition Cost (CAC).

In this post, we’ll dive deep into CAC and its critical partner, Customer Lifetime Value (CLTV), to show you how to stop wasting money and start scaling your business profitably.

Meet Your Marketing GPS: Customer Acquisition Cost (CAC)

So, what exactly is CAC?

Simply put, it's the average amount you spend to acquire a new customer. Knowing your CAC is like having a financial GPS for your business.

If your CAC is higher than your CLTV—the total revenue a customer generates over their relationship with you—you're essentially bleeding money. Without this crucial metric, you're navigating your business blindfolded.

Calculating Your CAC: It's More Than Just Ad Spend

The basic formula for CAC is:

CAC = Number of New Customers / Total Marketing & Sales Spend

But here's the kicker: "Total Marketing & Sales Spend" includes more than just your ad budget. 

It encompasses:

What not to include:

Real-World Examples of CAC

Let's break it down with a couple of examples. 

Example 1: 

Example 2: 

Unlocking Your Competitive Edge with Customer Lifetime Value (CLTV)

Now, let's talk about CLTV. This metric represents the total revenue a customer generates over their entire relationship with your business.

Why CLTV Matters

Knowing your CLTV can give you a significant competitive advantage. It allows you to be more competitive and creative with offers, and here's why.

Case Study Example - a short story:

A client of ours in the retail beauty space was under increasing competition from several different sources. The local market was increasingly fragmented, and profit and sales were declining.  

First, more retailers were offering the same service at a lower introductory offer. Second, substitute products became more prominent and could be purchased over-the-counter. And finally, competition was growing from estheticians providing the services out of their homes with little to no overhead. 

Intro Pricing and Gross Profit from A Single Customer:

Below is what we would call a "Prospect Income Statement" - in other words, how much money does the business make from one service. The intro price for the service was $79, it cost $40 in labor to service the customer, the cost to acquire the lead through Google Ads was $10, which left $29 in cash flow for operational expenses. So far, so good.

But leads began drying up with the standard offer of $79 and overall profit was declining for the business. 

So, a limited-time-offer (LTO) was offered to stimulate demand. The offer was for an introductory service at just $39 instead of the regular $79. Wow, at first glance that seems crazy. At the intro price of $39, the business was losing money on each customer. Below is what this looked like (where COGS is the labor to service one customer). 

Enter Customer Lifetime Value (CLTV):

For any customer that signed up for a membership, the CLTV was $1,200. Here's how the math breaks down (rather how the cash flow breaks down).

We can see initially the cash flow from this promotion was in the red and negative two thousand dollars ($2,000), which means the business was paying out more initially than it took in when it ran the promo. 

However, knowing the CLTV was $1,200 per customer and that on average 40% of prospects converted to long-term memberships, the cash flow more than paid for itself over time with a total value of over eights six thousand dollars ($86,000).

Had the business not understood CLTV nor had a membership business model it could have never offered this promotion without losing significant cash - that's the value in understanding CLTV. 

The Golden Rule: CLTV > CAC

Your CLTV must exceed your CAC for a sustainable business. Aim for a CLTV that's 3x or more of your CAC as a general guideline.

Scaling Your Business: Keeping CAC in Check

Ideally, your CAC should remain stable or decrease as you scale your spend. If it skyrockets, or increases your marketing is becoming less efficient.

Ready to Take Control of Your Marketing?

Start tracking your CAC and CLTV today. If you need help with your digital marketing, reach out to me at 951-444-0174 or [email protected].

Remember, effective marketing is about smart decisions, not just spending money. We’ll see you online!