>[!summary] > CAC represents how much a company spends to acquire a customer. Customer Acquisition Cost (CAC) measures the total cost a company incurs to acquire a new customer. It is calculated as: > [!formula] > $\text{CAC} = \frac{\text{Total Acquisition Expenses}}{\text{Number of New Customers}}$ > - Acquisition Expenses: > - *Simplified*: Marketing and sales cost for acquiring customers (not regular customers) > - *Complex method* (Sometimes referred as *Cost Per Acquisition (CPA)*): Marketing cost for acquiring customers + Wages connected with sales and marketing + Software cost (Eg. CRM, A/B-testing, analytics...)+ Additional professional services (Designer, consultants...) + Any other expense related to Acquisition efforts ### Why CAC Matters CAC helps businesses understand **how much they are spending to gain new customers**. A high CAC may indicate inefficiencies in marketing or sales efforts, whereas a low CAC suggests an effective acquisition strategy. ### CAC and Customer Lifetime Value (LTV) To assess financial sustainability, CAC is often compared to [[Customer Lifetime Value (CLV or LTV)]], which represents the total revenue a customer is expected to generate over their relationship with the company. The LTV:CAC ratio provides insight into the profitability of acquiring customers: - **LTV > CAC**: The business model is financially viable, as each customer generates more revenue than their acquisition cost. - **LTV < CAC**: The company is losing money on customer acquisition and may need to refine its strategy. - **LTV:CAC Ratio of 3:1**: A commonly cited benchmark for a healthy business, indicating that customers generate three times the revenue of their acquisition cost. ### Strategies to Optimize CAC - **Improve [[Onboarding Completion Rate]]**: Enhance website UX, optimize sales funnels, and refine messaging to increase conversions. - **Leverage Organic Channels**: SEO, content marketing, and referrals can reduce dependency on paid ads or sales commissions. - **Retargeting and Personalization**: Tailoring marketing efforts improves engagement and acquisition efficiency. - **Optimize Ad Spend**: Testing and iterating on paid campaigns ensures more efficient spending. ### Further Exploration... - How do businesses measure and optimize CAC in a subscription-based model?