The Customer Acquisition Cost (CAC) is the set of investments made to convince a Lead to become a customer.
Indications and networking. These used to be the two primary sources of clients for marketing companies. Happy customers indicating another customer and contact made at an event or course are excellent sources.
Have you already put on paper how much you would be willing to pay for a new client? The problem of not knowing how much we are spending on prospecting is not also knowing if that client is worth it.
And that can be dangerous for your business. The result can be a company full of customers, you exhausted, and accounts are almost always static or negative.
It is an essential financial concept for the health of a company and fully applicable to the business model of service providers, such as marketing agencies and consultancies.
And also, By defining a specific period for analysis, such as a particular month or year, the CAC can be calculated simply:
CAC = (everything invested in marketing + everything invested in sales) / number of clients conquered
Marketing, sales, search, all these expenses are added in this calculation. To give you a clearer idea, in an agency we could list the following expenses:
The Lifetime Value of the client refers to all the value granted by the client during the relationship with the company.
So with those two metrics, you create a balance. How much have you spent to acquire a customer, and how much will you spend when you become a customer. Our goal is to have the lowest possible CAC and the highest possible LTV.
This metric will show the balance, positive or negative, that investment had. Yes! Searching for a new customer is an investment, and ROI should evaluate like any other investment. So:
ROI = Billing generated – (investment + operating cost)
In the operating cost, we include the acquisition cost.
The goal of always keeping the low cost of acquiring new clients should be a command in any agency. What you can do as a manager to increase the Lifetime Value and decrease the Acquisition Cost (green arrows):