The cost of customer acquisition (CAC) means the price you pay to acquire a new customer. In its simplest form, it can be worked out by:
Do not get this metric confused with cost per action (CPA), as there is a strong distinction between the two. In ecommerce, cost per action is typically the amount you pay to convert a customer - i.e to make a sale - but this relates to both new and returning customers. CAC is all about acquiring new customers.
Ok, so we know what it is but why is it important? You’ve got a lot to do - how is this going to make you more money?
I hear you!
The cost of customer acquisition is one of the MOST important metrics for any ecommerce store, along with the lifetime value of a customer. Why? Because your store needs to make money. Which means you need to get a return on investment (ROI) from your marketing and sales campaigns. The important ratio to focus on, then, is one that tells you exactly how much value you're making from your customers in relation to how much it cost to acquire them.
It's as simple as this: your business will fail if your CAC is higher than your LTV. Let’s go through a few scenarios to assess what you should be aiming for with regards to the LTV:CAC ratio.