Customer Acquisition Cost (CAC): The cost incurred by a business to acquire a new customer. CAC includes all expenses related to sales and marketing efforts, such as advertising, promotions, sales salaries, and commissions. CAC is a key metric for businesses as it helps them understand the efficiency of their customer acquisition efforts and make strategic decisions about how to allocate resources. To calculate CAC, divide the total cost of sales and marketing efforts by the number of new customers acquired during that period. A lower CAC means that the company is acquiring customers at a lower cost, which is generally considered more efficient and sustainable. It's also important to compare CAC to the customer lifetime value, as the customer acquisition cost should be lower than the customer lifetime value in order to generate a profit.
Customer Acquisition Cost (CAC) and Lifetime Value (LTV) are closely connected, as they both provide important information about the cost and value of acquiring and retaining customers. CAC measures the cost of acquiring a new customer, while LTV measures the total revenue that a customer is expected to generate over their lifetime.
In order for a business to be profitable, the LTV of a customer should be greater than the CAC. This means that the revenue generated from a customer over their lifetime should be greater than the cost of acquiring that customer. If the LTV is less than the CAC, the business will not be able to sustain itself in the long run.
By comparing CAC and LTV, businesses can understand the efficiency of their customer acquisition and retention efforts, and make strategic decisions about how to allocate resources. A high LTV and low CAC means that the business is acquiring customers at a low cost and that these customers are generating significant revenue over their lifetime. This is generally considered to be a desirable outcome. On the other hand, a low LTV and high CAC means that the business is spending too much to acquire customers and these customers are not generating enough revenue over their lifetime. This is generally considered to be an inefficient outcome and should be addressed by the business.
Overall, CAC and LTV are two important metrics that provide insight into the cost and value of acquiring and retaining customers. By understanding and optimizing these metrics, businesses can make data-driven decisions to improve their customer acquisition and retention efforts and ultimately drive growth.