Imagine you\u2019re coming up on the busiest season of the year, and you’ve been conducting an experiment with your ads to see which will generate the most revenue.<\/p>\n
You have three ads in circulation and each ad produced ten customers. If all you care about is optimizing for customer acquisition<\/a>, you might think all three ads were created equal and allocate your budget accordingly.<\/p>\n But is that really the right way to look at it? Will treating all three ads equally really help maximize your growth? The answer is unequivocal: no. In fact, doing it that way is downright wrong for your business.<\/p>\n Pure customer acquisition metrics are popular, but dangerously inexact tools for calibrating and scaling your company growth. If you want to grow in a scalable and profitable way, then you have to look beyond customer acquisition and get smart with:<\/p>\n Customer acquisition cost is the best approximation of the total cost of acquiring a new customer. It should generally include things like: advertising costs, the salary of your marketers, the costs of your salespeople, etc., divided by the number of customers acquired.<\/p>\n It\u2019s a really useful number to help you calibrate your investment and make sure that you\u2019re making the right decisions for your growth.<\/p>\n Why does it matter? Put simply, if your customer acquisition cost is greater than your revenue for a long enough period of time, you\u2019ll go out of business.\u00a0Kind of a big deal, huh?<\/p>\n Let’s see how this typically works in practice.<\/p>\n Let\u2019s go back to our three ads. They\u2019re all producing the same number of customers – great, right? Maybe not. Let\u2019s take out our trusty calculator and take a deeper look.<\/p>\n Let\u2019s assume you bought 100 clicks per ad, but paid different amounts for those clicks. For Ad 1 it was $5 per click, for Ad 2 it was $10 per click, and for Ad 3 it was $20 per click.<\/p>\n Multiplying clicks times cost per click tells us that we paid $500 for 10 customers with Ad 1, $1000 for 10 customers with Ad 2, and $2000 for 10 customers with Ad 3.<\/p>\n That\u2019s helpful, but it\u2019s much easier for a poor marketer\u2019s brain to think on a per customer basis, so let\u2019s just divide the # of customers into the cost for each ad and now we see that your cost-per-customer is really different across each ad. With Ad 1 we are paying just $50 per customer! Looks like we should be running Ad 1 as much as possible and shutting down the other two as soon as possible.<\/p>\n This level of information is already a breakthrough from where we started. By introducing basic costs into the mix, we now have a much smarter understanding of which ad to push aggressively over the holidays and which to retire immediately.<\/p>\n But is that the best we can do? Not so fast.<\/p>\n If all you do is introduce advertising costs into how you optimize your tactics, you\u2019re already making progress, but advertising is just a part of the cost of acquiring a customer:<\/p>\n All of these factors should be accounted for in your CAC calculations<\/a> to make sure you\u2019re doing an honest accounting of what it\u2019s costing you to acquire a customer.<\/p>\n Because all of that data comes from different sources at different times, what that means in practice is that you\u2019ll be operating at two speeds with your CAC calculations. On a daily, weekly, and monthly basis you’ll be optimizing using the CAC and customer volumes that your advertising tools report with your online marketing team. On a longer term basis (monthly, quarterly, and annually) you’ll be using a more comprehensive view of CAC with your marketing, sales, and finance teams.<\/p>\n That said, all this focus on customer acquisition cost can actually really cripple your business. And here is why: costs are NOT necessarily a bad thing!<\/p>\n “Costs are NOT necessarily a bad thing”<\/p><\/blockquote>\n In a growing business, costs should just be viewed as investments<\/a>. Some of them are smart investments, others make no sense. How can you tell the difference?<\/p>\n By looking at customer lifetime value (LTV), or the revenue you get from a customer over their entire lifetime working with your business.<\/p>\n Lifetime value is basically the revenue you get from any given customer over some time horizon. Most businesses typically use a 1-, 3- or 5-year LTV calculation. If your company hasn\u2019t been around that long, you can do some relatively simple (for someone smarter than me) modeling on subscription renewal rates (in a subscription business model) or repurchase rates (in a more transactional business). LTV can be really challenging to understand in a young or digital business where there isn\u2019t a huge amount of historical data, but it\u2019s an absolutely critical metric you can use to complement your understanding of cost and increase the maturity of your business decision making.<\/p>\n In simple terms, LTV\/CAC helps answer the question, will the customers we’re acquiring contribute more revenue than they cost? Really exciting things start to happen when you are able to segment your LTV and your CAC by the definitions most interesting to your business. Let\u2019s go back to our three ads to understand the impact of adding in LTV.<\/p>\n By introducing the notion of lifetime value we\u2019ve shifted our understanding of which ad is \u2018best.\u2019 We can now see that even though initially Ad 1 was the clear winner in terms of the value it adds to our business Ad 2 is actually a better place to put our investment. Over time, Ad 2 will contribute the most value.<\/p>\n Understanding LTV\/CAC generally helps marketers unlock additional budget for their programs. For instance, it can help you determine whether you should be allowed to spend more acquiring larger customers who\u2019ll likely stick around longer and pay more in their lifetime.<\/p>\n This is what an \u201callowable CAC\u201d represents. Your allowable CAC is the maximum acceptable amount to pay for a customer. It\u2019s essentially a cap we pre-negotiate with our finance team. You can justify a higher allowable CAC if your LTV is higher.<\/p>\n Here are some other really interesting ways of looking at LTV\/CAC and questions you can answer:<\/p>\n The possibilities are endless, though a word of caution \u2013 don\u2019t get so caught up in this that you start doing too much micro-optimization. You could cut your business by 75 different dimensions in pursuit of a growth opportunity, or just focus on the big ones and actually go and do your job. I suggest the latter.<\/p>\n “You could cut your business by 75 different dimensions in pursuit of a growth opportunity, or just focus on the big ones and actually go and do your job. I suggest the latter”<\/p><\/blockquote>\n As my Finance colleague once wrote<\/a>, LTV CAC is where most marketers end their analysis. But they\u2019d be missing a major third variable: payback periods. This is the PhD level calculation most Finance people think about but most business people (especially marketers) barely acknowledge. Our head of Finance, Bobby, uses this as a test for evaluating performance marketers, and we VERY rarely find someone who passes on the first try.<\/p>\n Full disclosure: I failed. :)<\/p>\n A payback period is the rate at which you can get cash from your paying customers; this dictates how quickly you can reinvest in your business and ideally is a component of how you calculate CAC.<\/p>\n Payback periods matter because in a well-run business cashflow matters. It\u2019s better to have money today that lets you scale and grow more quickly than it is to have money 5 years from now.<\/p>\n Very small businesses tend to grow with a single tactic or channel (e.g., events). That makes it really simple to compute your costs, because it\u2019s all visible and straightforward. However, as your business gets more complex you have more channels and more ways that potential customers interact with your company, and that means you have to start thinking about CAC in a new way. Learn more about this in our free book,\u00a0Intercom on Marketing<\/em><\/a>.<\/p>\n Bigger and faster growing companies tend to combine many sets of tactics, each with its own CAC characteristics, into an overall portfolio of marketing tactics. Some will have very low CAC (e.g., a great blog) while others will be very expensive (e.g., bidding on competitor terms in Google Search). By understanding your CAC at a channel level, you can balance your budget across different aspects of your portfolio depending on what your business needs.<\/p>\n Need to grow super fast at any cost? Spend big in high volume channels even at a high CAC.<\/p>\n Want to optimize for company valuation? Focus on LTV\/CAC, to maximize customers that will pay you the most over the longest period of time.<\/p>\n Need to optimize for cash? Look for ways of acquiring customers cheaply and with a fast pay-back period.<\/p>\n Live chat is super interesting for performance marketers because it is one of the only communication channels which threads an entire customer journey, from prospect to loyal customer. It enables teams to use conversational marketing<\/a> and conversational customer engagement<\/a> strategies to engage leads and customers in a personal way.<\/p>\n Live chat lets you go from prospect to Close Won in a single chat session. What\u2019s more, with the right live chat product you can proactively engage visitors<\/a> who meet certain qualifying criteria. That means you’re spending a lot less of your marketing efforts and money driving people down the funnel.<\/p>\n![\"Do](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2018\/11\/Inline-4-700x408.png\")
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What is customer acquisition cost (CAC)?<\/h2>\n
![\"calculate](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2018\/11\/Inline-1-700x178.png\")
<\/p>\nHow customer acquisition cost (CAC) works day-to-day<\/h2>\n
![\"Why](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2018\/11\/Ads-with-customer-acquisition-cost1-700x561.png\")
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![\"How](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2018\/11\/X8CEY9fA-700x257.png\")
<\/p>\nAn even better way to use CAC: pair it up with customer lifetime value<\/a> (LTV)<\/h2>\n
What is customer lifetime value (LTV)?<\/h2>\n
How to calculate LTV\/CAC and why it\u2019s useful<\/h2>\n
![\"How](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2018\/11\/CAC-700x241.png\")
<\/em><\/p>\n![\"Example](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2018\/11\/LTV-ads-700x521.png\")
<\/p>\nWhy LTV effectively increases your allowable CAC<\/h2>\n
Channel level metrics:<\/h3>\n
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Segment level metrics:<\/h3>\n
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An even better (perhaps the best) way to think about CAC<\/h2>\n
How to spread CAC across channels<\/h2>\n
Looking to lower your CAC? Here are 3 ways live chat can help<\/h2>\n
1. It removes friction for high-intent leads<\/h3>\n
2. It increases LTV<\/h3>\n
![\"Live](\"https:\/\/www.intercom.com\/blog\/wp-content\/uploads\/2018\/11\/image12-700x410.jpg\")
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