What is CAC? Customer Acquisition Cost
Customer acquisition cost (CAC) is a key metric that measures the cost of acquiring a new customer for a business. This metric is particularly important for direct-to-consumer (DTC) businesses, as it helps them understand the efficiency of their marketing and sales efforts and the overall profitability of their business. While there are two types of CAC, new customer CAC and blended CAC (also referred to as “all CAC”), they are both important.
There are a few different ways to calculate CAC, but one common method is to divide the total cost of sales and marketing efforts by the number of new customers acquired during a specific time period. This method would be new customer CAC. For example, if a DTC business spends $50,000 on marketing and sales efforts in a month and acquires 100 new customers, their CAC would be $500 per customer. Is that acceptable for your business? To answer that question you should probably know what your customer lifetime value is. You might also want to know your ROAS.
Why Is Understanding CAC Important To Profitability?
Understanding CAC is important for DTC businesses for a few reasons. First, it helps them optimize their marketing and sales efforts by identifying which channels and tactics are the most cost-effective at acquiring new customers. For instance, your paid ads operators should be looking at new customer CAC in addition to looking at the lifetime value of a customer to see if the new customer CAC makes sense for the DTC business. This can help them allocate their resources more efficiently and potentially lower their CAC over time.
Second, CAC is a key driver of overall profitability. If a business’s CAC is higher than the lifetime value (LTV) of their customers, they will struggle to turn a profit. LTV is a measure of the total value a customer brings to a business over their lifetime, and it’s important for DTC businesses to ensure that their LTV is higher than their CAC in order to be profitable.
Finally, CAC is an important metric for DTC businesses to track because it can help them make informed decisions about their growth strategy. For example, if a DTC business has a high CAC but a low LTV, they may need to reconsider their business model or target market in order to be more profitable. On the other hand, if a DTC business has a low CAC and a high LTV, they may be well-positioned to scale their business and acquire more customers. What does this mean? Spend more money on paid advertising to acquire new customers! You have nothing to lose.
In conclusion, CAC is an important metric for DTC businesses to track because it helps them understand the efficiency of their marketing and sales efforts, optimize their resources, and make informed decisions about their growth strategy. By keeping an eye on their CAC, DTC businesses can better understand the profitability of their business and make strategic decisions to drive growth.