Everything you need to know about your CAC and what it means

Key quotes:

• "But here’s the deal: I don’t think any company knows exactly what it costs to acquire a new customer."
• "To see why, let’s start by digging into the prevailing metric when it comes to evaluating customer acquisition cost."
• "But none of these metrics actually tell us how much it costs to acquire a new customer."
• "Here’s why: Rather than relying on overly simplifying metrics, companies need to understand the cost curve for every marketing lever: A cost curve tells us what the true organic inflow of customers is — i.e., the level of acquisition we’ll get if we don’t spend any money on a given marketing lever."
• "More importantly, it also tells us what the marginal cost of acquisition is — i.e., much we have to spend to acquire future cohorts of customers."
• "Experimentation is the only way to estimate how much marketing is affecting acquisition above and beyond the natural inflow of new customers."

Key quotes:

• "Use Direct CAC to find how much you’re spending directly on marketing campaigns to acquire each customer."
• "Use Fully-Loaded CAC to find the total cost to acquire each customer."
• "In addition to the factors in Direct CAC, Fully-Loaded CAC (or “True CAC”) will include the salaries of your marketing and sales staff, related overhead costs such as rent and equipment for those staff, as well as any tools they use."
• "Roughly 15% of Charlie’s customers are business travelers, and he spends 25% of his marketing resources on acquiring them."
• "He knows that his business customers are worth more than other segments (based on an LTV calculation), so he’s willing to spend more."
• "Re-calculating CAC based on all that Charlie knows about his business travel customers would give us a Fully-Loaded CAC of $416.68."

Transcript: A portly Miller, barely sober enoughto sit on his horse, rambles on about the flighty wife of a crotchety old carpenter and the scholar she takes as her lover. To get some time alone together, the scholar and the wife play various tricks that involve feigning madness, staging a biblical flood, and exposing themselves in public. But the parish clerk is also lusting after the wife, and comes by every night to sing outside her house. This becomes so tiresome that she tries to scare him away by hanging her rear end out the window for him to kiss. When this appears not to work, her scholar decides to try farting in the same position, but this time, the clerk is waiting with a red-hot poker. This might all sound like a bawdy joke, but it’s part of one of the most esteemed works of English literature ever created: The Canterbury Tales, which seamlessly blends the lofty and the lowly. The work consists of 24 stories, each told by one of Chaucer’s spirited characters. Narrators include familiar Medieval figures such as a Knight, a Clerk, and a Nun, and the less recognizable Reeve, and Mancible, and others. The Tales are... See more →

Transcript: One of my earliest memories is of trying to wake upone of my relatives and not being able to. And I was just a little kid,so I didn't really understand why, but as I got older, I realized we haddrug addiction in my family, including later cocaine addiction. I'd been thinking about it a lot lately,partly because it's now exactly 100 years since drugs were first bannedin the United States and Britain, and we then imposed thaton the rest of the world. It's a century since we madethis really fateful decision to take addicts and punish themand make them suffer, because we believed that would deter them;it would give them an incentive to stop. And a few years ago, I was looking atsome of the addicts in my life who I love, and trying to figure outif there was some way to help them. And I realized there were loadsof incredibly basic questions I just didn't know the answer to, like, what really causes addiction? Why do we carry on with this approachthat doesn't seem to be working, and is there a better way out therethat we could try instead? So I read loads of stuff about it, and I... See more →

Key quotes:

• "Measuring CAC is necessary when running a BtoC or BtoB (SME) business."
• "Why is it so important? CAC is one of the main KPIs to analyze when scaling up."
• "It’s useful to A/B Test different acquisition channels or to segment your customers."
• "CAC is computed as sales & marketing expenses divided by the number of new customers over a certain period of time (known specifically as blended CAC)."
• "Different sorts of CAC can be measured: Don’t just compute a blended CAC."
• "Be aware of your CAC per acquisition channel and ideally per customer."

Key quotes:

• "The CAC ratio is calculated by looking at the quarter over quarter increase in gross margin divided by the total sales and marketing expenses for that quarter."
• "Here’s the formula for CAC ratio, assuming you’ve just finished the second quarter of your fiscal year: [Gross Margin Q2 — Gross Margin Q1] × 4 — — — — — — — — — — — — — — — — — Sales and Marketing Expenses for period Q2 The gross margin above is annualized, which is why it’s multiplied by 4."
• "Here’s the equation: [3-Year Gross Margin for customers acquired during period] — — — — — — — — — — — — — — — — — — — — — — — — Sales and Marketing Expenses for period You may ask why we chose 3 years."