How to calculate the CAC
Calculate the customer acquisition cost by dividing all marketing and sales expenses by the number of new customers acquired in the period you spent the money.
Customer acquisition cost = Cost of marketing and sales / Number of new customers acquired (in the same period).
For example, if you spend €200 on marketing and sales in a month and acquired 50 new customers in the same month, your CAC is €4 (€200 / 50).
How to reduce your CAC
• Referral programs / Word-of-mouth
• Improve the conversion rate for your service (website, app)
• Add additional value to your service
• Build strong ad-campaigns
• Use marketing automation
• Optimize your sales funnel
Months to recover CAC
As we already discussed, the customer acquisition cost is one of the prime metrics that will decide your business fate. If you pay more to acquire a customer than your customer lifetime value, you will not stay in business for long. To get a decent understanding of whether your company will fail or succeed, compare your customer acquisition cost to the customer lifetime value. A good rule of thumb is to have a CLV to CAC ratio of 3:1. If this ratio is closer to 1:1, that means you are not making any profit on customers. If it is closer to 5:1, think about ways to invest in new opportunities to get more customers and not miss out on new marketing opportunities. With that being said, it is vital to know how long it will take you to recover your initial customer acquisition cost and when you are breaking even. The metric also gives insights into how much cash you need upfront to sustain the business while trying to get to the break-even point. As time passes by, the risk of churn increases, and it is unlikely that customers stay with you forever. That’s why a short payback period helps you to reach the break-even point more quickly and enables your business to grow.
How to calculate months to recover CAC
Months to Recover CAC = CAC / (ARPA * GM%)
For example, you spend €1000 to acquire a new customer. This customer pays a monthly fee of €100, which results in a gross margin of €80 per month (80%). It would take you 12,5 months to recover the initial €1000 you invested in getting the customer. If the customer churns before that 12,5 months, this will cause a loss.
How to reduce months to recover CAC
• Reduce customer acquisition cost by finding new and more effective marketing channels
• Reward people to upgrade to higher plans
• Focus on expansion revenue through up-sells and cross-sells
• Experiment with pricing plans
• Reward people to use annual contracts