Customer Acquisition Cost (CAC) vs. Customer Lifetime Value (CLV)
We write a lot about metrics on the WordStream blog. From click-through rate (CTR) to conversion rate (CVR) to return on investment (ROI)—if it’s measurable, and it can help you better understand the performance of your online advertising campaigns, we have the goods!
Today, we want to talk about a couple metrics that, while related to advertising performance, are not necessarily advertising specific and are meant to help you better understand performance at a business level. Customer acquisition cost (CAC) and customer lifetime value (CLV) are two distinct yet equally pivotal metrics. Let’s discuss why they’re important, how they differ, how they’re related, and how you can calculate each.
What Is Customer Acquisition Cost (CAC)?
Customer acquisition cost (CAC), as you might gather from the name, is the cost of converting a prospect or convincing a potential customer to become an actual customer. If this sounds a little like cost per action or acquisition (CPA), don’t worry, you’re not going crazy—the two are related but not the same. You can separate the two in your mind by thinking about CPA as a campaign-level metric, and CAC as a more overarching, business-level metric. CAC encompasses the cost of acquiring business across all your marketing efforts—online and offline, billboards and media placements, Google Ads and Facebook ads, even the cost of a store-front sign.
Also keep in mind that your CPA is not the same as your cost per conversion. If you’re running a lead gen business, an “action” in one of your Google Ads campaigns might be a content download, a webinar registration, a phone call, some other conversion action that is not actually a prospect becoming a customer. If you’re an ecommerce business, your CPA for a given campaign might very well be the cost of enticing a prospect to click through to your online store and then buy something.
How to Calculate CAC
Calculating CAC is a matter of dividing your overall marketing expenses by the number of net new customers acquired in a given period of time. Because of the varying degrees of effectiveness of different marketing channels, it’s helpful to resist the temptation to bundle up all your expenses into one universal CAC calculation—and not only because doing so will give you a muddled perception of how much it costs to convert your prospects. It’s also because segmenting your CAC calculations by channel will allow you to determine which channels are most effective and how specific channels increase or decrease in effectiveness over time.
SEO is a prime example of this. Lumping in SEO and content marketing, which are longer-term marketing strategies, with Google and Facebook advertising when calculating your business-wide CAC is going to give you an artificially enhanced understanding of your overall SEO performance and a watered-down understanding of performance in your online advertising channels. Why? Because SEO and content marketing typically take longer to yield results.
Still, your SEO CAC may very well …read more
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