Customer acquisition cost (CAC) shows exactly how much it costs to acquire new customers and how much value they bring to your business.
When combined with customer lifetime value (CLV), this metrics helps companies determine how viable their business model is. For this stat, you need to know:
- Total spend on acquiring new customers(TS): This can include spending on sales, marketing, and revenue operations in a given time period
- Total number of new customers acquired(TNC)
Customer Acquisition Cost (CAC) = TS/TNC
The Customer Lifetime Value to Customer Acquisition Cost Ratio (CLV:CAC) measures the relationship between the lifetime value of a customer and the cost of acquiring that customer.
So how do you know if you’re spending the right amount? You need some numbers. First, you need to know how long the average customer sticks with you before they cancel their service, that’s CLV. Because of course the longer a customer sticks with you, the more valuable they are.
Customer Lifetime Value (CLV) = Gross Margin % X ( 1 / Monthly Churn ) X Avg. Monthly Subscription Revenue per Customer
Once you have the lifetime value of a customer, you can turn your attention to calculating how much you spend acquiring a customer. Ideally, you want to recover the cost of acquiring a customer within the first 12 months or so.
Cost to Acquire a Customer (CAC) = Sales and Marketing Costs / New Customers Won
An ideal LTV:CAC ratio should be 3:1.The value of a customer should be three times more than the cost of acquiring them. If the ratio is close (i.e.1:1), you are spending too much. If it’s 5:1, you are spending too little. In fact, you are probably missing out on business!
Knowing these numbers allows you to understand what drives your business – the better the picture, the more levers you can pull to grow your business.