CAC Payback Time
CAC Payback Time, or CAC Payback Period, is one of the most important ecommerce KPIs for growing businesses. Read on to find out how to calculate your CAC Payback Time, and what you can do to improve it.
What is CAC Payback Time?
The ‘CAC’ in ‘CAC Payback Time’ stands for ‘Customer Acquisition Cost’. Therefore, your CAC Payback Time (or CAC Payback Period) represents the number of months it takes your average customer to ‘pay back’ whatever it cost your business to acquire them.
‘CAC Payback Time’ can also be known as ‘Time to Recover CAC’ or ‘Months to Recover CAC’. All of these various terms are used to describe the same concept: given how much it cost your business (on average) to acquire a new customer, how long does it take for this customer to ‘break even’.
Customer Acquisition Cost (CAC) Explained
Customer Acquisition Cost is a marketing KPI (Key Performance Indicator) that businesses use to measure the average spend required to acquire a single customer. Some businesses refer to this value as their CPA (Cost Per Acquisition), but these are just different acronyms to refer to the same key concepts.
Whether your business is a new startup or a giant enterprise, the amount of money it’s costing you to acquire each new customer is vital, as it serves as a measure of the effectiveness of your marketing activities.
Your Customer Acquisition Costs (CAC) is an especially important metric as it’s essential determining the sustainability (and eventual profitability) of your business. For example, if your customers are (on average) spending more than the cost required to acquire them through marketing, you know that these marketing activities are profitable.
How to calculate Customer
Acquisition Cost (CAC)?
To calculate your Customer Acquisition Cost over a certain time period, you need to divide your total acquisition spend by the number of new customers you managed to acquire in that time period.
Calculating your total acquisition cost
To work out your Customer Acquisition Cost, first you need to first calculate your total marketing cost. This is accomplished by summing up the various spends for your different paid marketing activities. Typically, this data can be found within the paid marketing platforms themselves.
For example, you can see how much you have spent on Paid Advertising on Google and Bing from within the Google Ads and Bing Ads platforms respectively. Similarly, you can find your total Facebook spend on the Facebook Ads platform.
You then need to establish the number of new customers that those marketing activities have garnered your business. This information can normally be found in your Data Analytics platform. Of course, you can always find information about your new customers from your backend ecommerce platform.
However, to uncover the most useful, actionable insights about the effectiveness of your various marketing strategies, and to establish with activities are helping your sustainability or profitability (or which are hindering it), you really need a way to tie your newly acquired customers to the marketing channels through which they were acquired.
For this, we recommend you use a Data Analysis platform like Google Analytics or Adobe Analytics (linked with your various marketing platforms like Google Ads) to enable you to calculate not just your average CAC, but your CAC for every Channel (e.g. Paid Search vs Paid Facebook) Campaign (e.g. Dynamic Product Ads vs Brand Ads) and User Segments (e.g. Male vs Female, Desktop vs Mobile, etc.) individually.
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Existing Customers vs New Customers - Which metric should you use?
When a business is quantifying their customer acquisition cost, there can be a degree of confusion as to whether they should be evaluating the cost of acquiring each transaction, or the cost of acquiring a new customer.
This is a really important distinction. Generally speaking, businesses analysing CPA (Cost Per Acquisition) or CAC (Customer Acquisition Cost) will be doing so to evaluate the effectiveness of their marketing activities in a broader context, for example to assess sustainability or profitability. The most common application of Customer Acquisition Cost is to combine it with the average Lifetime Value (LTV) of your customers, to discern:
1. Whether or not your customers are ‘paying back’ what it cost your business to acquire them, and
2. If so, how long this process takes
For this analysis to make sense, you need to make sure you’re only ever looking at new customers when calculating your Customer Acquisition Cost.
The average marketing spend required to generate each transaction (or order) for your business is another sensible KPI to keep track of. However, these repeat orders shouldn’t be factored in to your CAC; rather, your repeat orders should factor into the Lifetime Value side of this analysis, if you want an accurate idea of your sustainability.
Note: If you do want to keep track of the average marketing spend required to generate each individual transaction (or order) for your business, the metric you’re looking for is CPO (Cost Per Order).
Why is CAC Payback Time so important?
Once you’ve established your average Customer Acquisition Cost, you can combine it with other ecommerce KPIs like customer purchase frequency and Average Order Value (AOV), to establish how much time your business should expect to wait before the average customer might be expected to ‘break even’.
This can help you look at the various aspects of your marketing, customer retention and AOV initiatives from a strategic perspective. For example, if you’re finding that your customer acquisition cost is in the right region, given your average order value and your growth targets, you know that you should focus your activities on increasing your customer purchase frequency in order to decrease your CAC Payback Time.
What’s more, having this type of high-level strategic view can help your broader team synchronise their activities to achieving the same overarching goal. There are countless ways to influence your CAC Payback Time, but by measuring it across your different channels and demographics, and tracking it visibly, you can help align the individual goals of your teams and team members with the broader business requirements. This kind of measurable, quintessential KPI can also prove highly effective in galvanising your team to think of ideas within their ‘spheres of influence’ that might help help the business make gains in the requisite direction.
Need help calculating or improving your CAC Payback Time?
If you’d like help evaluating your CAC Payback Time, or analysing which activities you should focus on in trying to ‘move the needle’ in achieving your top-level business goals, Optiminder is here to help. We can help you assess which of the KPIs you should focus on to achieve the CAC Payback Time you need, and help you draw up an optimisation roadmap of initiatives to test to help you get there. If you don’t have an in-house optimisation team, or they want help executing this roadmap, we can help you deliver these initiatives too. Reach out today to find out how Optiminder can help you build a sustainable and profitable business.