So a couple of days back, I was having a discussion on CAC with a founder friend of mine who owns a D2C brand.
He had recently hired a full-time content creator who would endeavor to bring brand awareness and engagement to their social media platform. I asked him if this expense would come under Customer Acquisition Cost(CAC).
What do you think? Do the salaries of content creators, marketing professionals, hr come under CAC ?
The formula to determine customer acquisition cost is :
CAC=Sales & Marketing Costs/Number of Customers acquired
According to Feedough- “ CAC is the total cost a brand incurs in order to gain a new paying customer over a period of time. This cost includes marketing and sales costs, salaries paid to the employees, professional costs, software costs, and other overheads to get the customer on board.”
To understand this further let’s take an example:
John is a content creator of XYZ company. He launched several social media campaigns to attract new customers. John’s annual salary is Rs. 6,00,000. He wants to determine his customer acquisition cost:
CAC=(600000+12000+10000+11000+10000)/(150+120+125+110)= Rs. 1273.2
This means that value of each customer to your brand is Rs. 1273.2
Does the cost include salaries paid to HR or tech employees?
CAC logically will only include salaries paid to employees associated with marketing and sales. This will also include any cost incurred in availing services or SAAS for designing, marketing, consulting etc.,
Basically, all costs accrued and/ funds allocated towards your sales and marketing initiatives in terms of salaries, services, rents and operations to acquire paying customers for your brand will come under the ambit of sales & marketing costs.
CAC & CLV
Customer Lifetime value (CLV) always goes hand in hand with CAC. In order to calculate the viability of your brand and profits that you can earn, its important that you compare your CAC with CLV.
CLV is a metric that tells you how much a customer brings revenue to your brand during it’s entire time of association with your brand. For example, If a customer spends Rs 2000 a year for 2 years with XYZ. The CLV for this customer would be 4000.
Ratio of CAC to CLV
ROI is calculated by determining the ratio of CLV to CAC
For example in the above instance ROI for XYZ would be 4000(CLV): 2546.5(CAC of 2 years)= 1:1
A 1:1 ratio means the business is at no profit and no loss. This means that customer is paying exactly what business had paid to acquire them.
A less that 1:1 ratio would mean the business is spending more in acquisition as compared to what customer is paying back. This means acquisition strategy needs to be rethought of.
A ratio of 3:1 or above signifies that the brand is earning more than what it is spending in acquiring the customer. Such brands are likely to sustain and grow in the long term.