Two Cents - Insights Brought to you by Vectra Bank

There are a host of metrics small businesses need to track. These different signals give businesses crucial insight into operational and financial performance. One of the most important metrics to track is customer acquisition cost (CAC). Determining average CAC is a necessary calculation for any business: It provides a snapshot of what you're spending to acquire new customers versus the actual gains you've generated.

How to calculate CAC

CAC is an essential metric in many ways, and it's easy to compute compared with various other key performance indicators. The equation looks like this:

• Total spend on sales and marketing for a given cycle / Total new customers acquired during a given cycle. 

It breaks down to dividing your marketing outlays by new customers. The end result is the average dollar amount it takes for your business to gain a paying customer, not just to generate a lead. You can calculate this metric per month, quarter, year, or other increment of time — making CAC a versatile metric.

• Say your company tallies $5,500 in total sales and marketing spend for a specific month. In that time, 1,500 new customers made a purchase. The CAC in this scenario would be $3.66. 

What does CAC tell you?

At a high level, CAC gives businesses visibility into how efficiently they're converting new customers. This helps in many ways, whether allowing business leaders to allocate marketing spend more wisely or highlighting a trend of rising acquisition costs that may affect profitability. 

Something else to think about is CAC's value to investors. A low CAC is generally considered as being indicative of a healthy company. 

Tips to using CAC

The process of calculating CAC is relatively simple. However, there are still some best practices to be aware of, as well as common mistakes to avoid:

• Be smart about the costs included: Figuring out your CAC means determining what actually goes into total sales and marketing costs. Some of the basic components of this variable include: staff salaries and bonuses, ad spend, content creation, overhead costs and technology costs. However, some costs may skew CAC, rendering it less insightful. Consider if you made a big investment in new marketing technology, but the implementation takes months. If you log all those costs in one month, but don't expect immediate ROI, CAC could swing wildly. 
• Evaluate jointly with LTV: Customer lifetime value (often abbreviated LTV or CLTV) is a measure of the revenue an average customer generates over their time with your business. Sometimes customer lifetimes last tens of years, others have a shorter cycle. In any case, analyzing LTV and CAC together can help businesses better understand their bottom line in terms of total costs and total revenue per customer.
• Use CAC creatively: CAC, as noted, is a versatile metric. You can apply it in different situations to mine for deeper insights. For instance, CAC can be used to analyze acquisition performance down to the marketing channel, or during a months-long sales promotion.

CAC will deliver crucial transparency into operational and financial performance. If you want to learn more about optimizing your business, contact your local Vectra Bank today.

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