If you’ve spent even a small period of time in the digital marketing space, you’ve probably heard the term “CAC” tossed around like confetti. But how much do you really know about this vital and often underestimated business metric?
First, let’s cover the basics. CAC is an acronym for Customer Acquisition Costs, which refers to the average costs of acquiring a new customer through your marketing efforts. This metric is particularly popular in eCommerce because it can create benchmarks for every single type of business, whether you’re selling health and wellness products, online memberships, or any niche industry in between.
Simply put, understanding your CAC ratio often sets struggling businesses apart from those who flourish in the market. Now, let’s dive deeper into what contributes to your CAC numbers and how you can leverage this metric to achieve streamlined growth for your brand.
- What Is CAC & Why Does It Matter?
- How Do You Calculate The CAC Formula?
- The Law of Mom Vs. Pyrrho: A Lesson In CAC
- What Are The Types of CAC & Which Should You Use?
- Business CAC
- Weighted CAC
- nCAC
- Paid CAC
- rCAC
- Channel-Specific CAC
- What Is Context & Why Does It Matter?
- What is the relevance?
- What are we trying to optimize?
- AOV vs. LTV: Understanding North Star Metrics
- AOV
- LTV
- 3 Ways To Improve Your CAC (or CPA)
- Better Ad Structures
- CTR-Driven Creatives
- Conversion Rate Optimization
What Is CAC & Why Does It Matter?
As we mentioned, CAC is an important metric that refers to how much money a business spends to acquire a new customer through its marketing channels. Depending on your marketing strategy and your business model, the cost of customer acquisition can vary widely from one brand to another. By taking the time to understand how CAC factors into your marketing spend, you can create more effective strategies for reaching your target audience without wasting your advertising dollars.
Most importantly, having a strong customer acquisition strategy can give you an advantage over your competition and allow you to create more precision in your marketing campaigns. Unlike old-school advertising methods that forced businesses to become overly broad in their messaging, social media and other digital marketing avenues have made building targeted campaigns for your niche audience simple and easy. So, you can use the principles of CAC to increase your ROI (return on investment) and attract more potential customers to your business.
How Do You Calculate The CAC Formula?
Technically, there are two ways to look at your CAC, either with business costs or without them. In most marketing strategies, we look at this number with business costs included because it gives us a more accurate picture of your ROI.
With that being said, here’s how to calculate your CAC in 3 steps:
Step 1: Set A Time Frame
Like most data-driven calculations, CAC is most effective when narrowed down to a precise period. So, whether you decide to look at your CAC on a weekly, monthly, or yearly basis, determining the time frame will give you the most accurate results.
Step 2: Calculate Your CAC
Thankfully, the customer acquisition cost formula is relatively easy to follow, allowing you to quickly assess your CAC calculations.
First, you would add up the total costs associated with your marketing campaigns. This can include everything from employee salaries for your marketing team to content creation tools, paid advertising costs, sales expenses, and anything else you utilize in your marketing strategy.
Next, divide that number by the total number of customers your acquired from your ad campaign. This will show you what your current CAC ratio is and allow you to make strategic adjustments to your ad spend based on your results. Perhaps even more importantly, this number indicates your ads’ effectiveness, which can help you fine-tune your messaging for your target audience.
Let’s look at an example…
Imagine you’re a SaaS company that sells CRM (customer relationship management) tools looking to attract new customers through target social media marketing. In this scenario, your marketing costs might include things like…
- Paying your sales team
- Creative costs
- Paid ads on platforms like Google, Facebook, or Tik Tok
- Inventory management and other business costs
After calculating these costs, you determine that you spent around $30,000 on your marketing campaign and acquired around 2,000 new paying customers. Without any additional technical or production costs, this would give you a CAC of $15.
However, if your SaaS products require additional business costs throughout the year, and you decide to factor those into your CAC formula, this number could be even higher. That’s why understanding which costs do or don’t belong in the cost-per-acquisition calculations is so important for getting an accurate result.
Step 3: Evaluate Your Metrics
Once you have your CAC number, you can compare it to other key business metrics. This can provide invaluable information about your marketing efforts, like which social media platforms deliver the highest ROI and what messaging angles impact your target audience most.
The Law Of Mom Vs. Pyrrho: A Lesson In CAC
Here’s a great way to imagine your CAC, as told by Greek mythology. Unlike many other eCommerce metrics, CAC exists on a curve, with the lowest point being a customer who would willingly buy anything you sell them and the highest point being a customer who is nearly impossible to persuade.
So, let’s say your Mom is the lowest point on your CAC curve. Like most loving parents, your mother would gladly buy anything from your business to support your dreams. That makes the cost of acquiring her business virtually non-existent. On the opposite end of the spectrum, you have the Greek God of Skepticism known as Pyrrho. As you can imagine, Pyrrho will NOT be easily persuaded to buy anything from your business, which makes the cost of acquiring a purchase from him outrageously expensive.
Now, for every business, there is a volume number connected to every CAC number on the curve. The goal of evaluating your business metrics is to move along the CAC curve in a way that increases your overall revenue and eliminates wasted marketing expenses by finding strategic ways to acquire more new customers without draining your ad spend.
Essentially, the CAC curve forces you to consistently find ways to attract purchases from the customers at the extreme end of the curve, like Pyrrho, by continuously recalibrating your marketing campaigns based on these results.
What Are The Types Of CAC & Which Should You Use?
Once you know how to calculate your CAC, you can start breaking down these metrics even further by looking at the different types of CAC and what each one can tell you about the effectiveness of advertising strategy.
Unfortunately, many eCommerce business owners make the mistake of relying solely on their average CAC to make important decisions about their marketing strategies. The problem with this approach is that an average is not a reliable business metric since it only represents the central value of your data. In other words, the average customer does not align with your CAC average.
Instead, we look at varying types of CAC that can provide us with some actionable insight about our audience. For online businesses, you should be concerned with five main CAC types when evaluating your metrics.
Business CAC
“What is it?”
Business CAC is the most common type of metric in this category, and it’s typically the first type of CAC we look at when developing a digital marketing strategy. This is the standard formula for calculating cost per acquisition, which starts by taking your total marketing expenses, divided by the amount of new customers acquired over a specified period of time.
“Why use it?”
You can think of your business CAC as being a holistic picture of your customer acquisition costs. For startups and other small eCommerce businesses, this is a great tool for assessing your current sales funnel and adjusting it to meet your growth goals.
Weighted CAC
“What is it?”
Whereas business CAC focuses on your total costs for any given marketing campaign, weighted CAC is a bit more specific. Instead of including other expenses like paying your employees and inventory management, weighted CAC is calculated by taking your total ad spend and dividing it by the number of new customers acquired. This eliminates the impact of other business costs from the equation and allows you to focus strictly on your marketing efforts.
“Why use it?”
When you isolate solely your advertising costs, it gives you a very clear picture of how effective your current creative strategy has been. We like to use this type of CAC to better plan our marketing campaigns and move advertising dollars away from strategies that aren’t yielding the results we want.
nCAC
“What is it?”
nCAC, which is an acronym for new customer cost per acquisition, refers specifically to the amount of money you spend to acquire a brand new customer for your business. To find this type of CAC, you would take your total marketing costs minus any expenses you use for retargeting, referral programs, and other customer retention strategies. This is sometimes called CPA or cost per action. After you have this data, you can divide it by the total number of new customers for your business.
“Why use it?”
Attracting potential customers is by far the most costly part of any marketing campaign, which is why evaluating your nCAC is so important. With this insight, you can make better choices about the messaging you use to bring in new business.
Paid CAC
“What is it?”
While other types of CAC use the total of all your marketing costs, paid CAC only deals with direction response advertising channels like Facebook, Google, and other avenues that encourage potential customers to purchase. That means you can eliminate organic marketing strategies like SEO and branded content from your calculations. Ultimately, this allows you to accurately assess the ROI you’re receiving from these platforms.
“Why use it?”
Even though organic traffic is a key component of running an eCommerce business, the reality is that you’ll still need to invest most of your marketing budget into paid advertising channels. That’s why monitoring your paid CAC regularly is important so you can be sure that your ad spend is being used effectively.
rCAC
“What is it?”
You can think of rCAC as the opposite of your nCAC since it deals exclusively with returning customers. In this scenario, you would calculate all of your marketing costs aimed at retargeting and customer retention and divide it by the total sales from these customers.
“Why use it?”
Although most marketing campaigns are targeted at acquiring new customers, the value of retaining your existing customers can be underestimated. For instance, many eCommerce brands are centered around achieving a high customer lifetime value, or CLV. To do this, you need a strong customer retention strategy that keeps these loyal buyers coming back to your store again and again, and evaluating your rCAC is the first step toward doing this.
Channel-Specific CAC
“What is it?”
The last type of CAC we look at is also the most specific because it deals with individual marketing channels. Whether you’re looking at Facebook, Google, or email marketing strategies, each platform comes with a unique cost to acquire customers. To calculate this metric, you would determine how much money you spent on that specific channel, divided by the total number of customers acquired from that source.
“Why use it?”
In many ways, digital marketing is a bidding game. That means that you have to be very strategic about where you place your advertising dollars, and monitoring the CAC for each specific marketing channel allows you to determine which platforms are delivering the best results for your business. So, you can stop wasting resources on marketing strategies that aren’t helping you achieve your goals.
What Is Context & Why Does It Matter?
On their own, each type of CAC is really just numbers on a spreadsheet. So, to turn this information into an actionable plan to achieve your objectives, you need to give your data context.
From an eCommerce standpoint, context is the missing link between your business metrics and the next steps you need to take to meet your goals. To give context to your CAC numbers, you should start by asking yourself two important questions.
What is the relevance?
No matter what type of CAC you’re looking at, you should be able to notice a pattern as to whether this metric is improving, staying stagnant, or getting weaker based on how often to evaluate the data. That’s why narrowing your CAC down to a specific period of time is so important.
For instance, if you decide to evaluate your paid CAC on a weekly basis, you’ll be able to determine if the marketing channels you’re using are still yielding the desired results or if you need to shift your ad spend to more lucrative options. Put simply, giving relevance to your CAC gives you the power to clearly see where the opportunities do (or don’t) exist.
What are we trying to optimize?
Optimization is the key to achieving great results for your bottom line, and evaluating your CAC allows you to direct your efforts more precisely. But before you can do that, you need to decide which key metric you want to optimize, which comes down to two main categories.
LTV vs. AOV: Understanding North Star Metrics
In our business, we refer to these as our North Star metrics because they are the ultimate data point that guides all of our strategic marketing decisions. Depending on the business model of your eCommerce brand, you’ll likely to looking to optimize either your AOV or LTV and your CAC numbers play a huge role in processing this information effectively.
AOV (Average Order Volume)
AOV (average order volume) refers to the average dollar amount each customer spends visiting your online store. In terms of CAC, you can think of your AOV as the amount of money you spent to acquire any given customer vs. the amount of money they spent when making a one-time purchase.
To find your optimal AOV, you would start by taking the current AOV for your store minus the profit margin you want to achieve by the end of a specific time window, and whatever you have left will represent your business CAC. From there, you can also find your marketing CAC for the AOV and pass it along to your marketing team for further insight.
LTV (Lifetime Value)
On the other hand, some brands benefit more from focusing on their LTV, meaning the amount of money a customer will spend with your brand over their entire lifetime. We think of this as a “payback window.” Unlike AOV, LTV is a great North Star metric for brands that sell products that customers regularly repurchase, like supplements or other wellness products. It’s also beneficial for brands that have enough funding to pay more money upfront for strategies that will pay off later down the line.
Hypothetically, let’s say you have a brand looking to optimize your LTV over a 60-day window. You would start by looking at your AOV on the first day of this window with the goal of increasing it by day 60. So, if a customer spent $100 in your store on the first day, a good goal would be to increase their purchases to $130 by the end of 60 days.
Now, you can bring CAC into this equation by subtracting that $130 and subtracting your target profit margin, leaving you again with your business CAC, which you can use to determine your strategy’s effectiveness.
3 Ways To Improve Your CAC (Or CPA)
Of course, all of the metrics in the world don’t make a difference if you don’t have the right strategies to improve your numbers. Thankfully, there are three simple paths you can take to improve your CAC, or CPA, and give your brand the revenue boost you’re looking for.
Better Ad Structures
Digital marketing platforms like Facebook and Google give businesses many options to choose from when it comes to structuring their ads. Choosing the right structure can also help you eliminate costs and streamline your results.
Facebook, for example, uses a bidding automation feature called cost caps that allow you to limit how much of your ad spend the platform can utilize for any given marketing campaign based on your metrics, CAC included. This allows you to set a target CAC for your ads, which Facebook will use to decide where your marketing dollars go.
You can learn more about ad structures in this guide:
CTR-Driven Creatives
Once you have a strategic ad structure, you can optimize your CTR or click-through rate. Keep in mind that this is the most difficult path to improving your CAC since it relies on introducing your brand to totally new audiences and enticing them to click on your ad. That’s why being about to churn out a high volume of ad creatives is essential, as it allows you to run effective A/B testing to narrow down which ads your customers are more interested in engaging with.
The good news is that we’ve developed a unique framework for producing your ad creatives at scale and countless templates you can use to get the creative ideas flowing. You can check that content out here:
Conversion Rate Optimization
Last but not least is conversion rate optimization. Similarly to CTR, optimizing your CR means taking the number of people who click on your ad, increasing the number of them who make a purchase, or causing them to buy their items faster. Beyond your ad creatives, CR optimization involves fine-tuning your entire sales funnel, including how your store is merchandised.
If you want more insight into how to merchandise your store for maximum results, follow our guide here:
How To Start Leveraging Your CAC
With so many metrics to evaluate, finding the time to properly optimize your CAC can be a huge challenge. Our team has supported eCommerce brands of every scale with data-driven strategies that deliver powerful results. Connect with us to learn more about our process today.