Customer Acquisition Cost (CAC) vs. Cost Per Acquisition (CPA)

The article delves into the key differences between CAC (Customer Acquisition Cost) and CPA (Cost Per Acquisition), two metrics often mistakenly used interchangeably.

• CAC specifically measures the cost of acquiring a paying customer, while CPA measures the cost of acquiring something that's not yet a customer, like a registration, activated user, or trial.
• CPA serves as a leading indicator for CAC, as it tracks the cost of actions that ultimately contribute to customer acquisition.

Three Examples Illustrating the Difference

The article provides real-world examples from Dropbox, HubSpot, and Facebook to demonstrate the distinction between CAC and CPA.

• For Dropbox, CAC represents the cost to acquire a paying user on their pro or team plan, while CPA tracks the cost of acquiring a free user, activated user, or other non-paying actions.
• In HubSpot, CAC is the cost to acquire a customer on a specific plan, while CPA measures leading indicators like cost per lead, cost per sales qualified lead, and cost per trial.
• Facebook's model focuses on acquiring advertisers as paying customers (CAC), while CPA would be used for user-related metrics like cost per registration and cost per activated user.

The Flawed Basic CAC Calculation

The article highlights the limitations of the basic CAC formula often found online, which simply divides total marketing and sales expenses by the number of new customers acquired.

• This formula doesn't account for time periods between expenses and customer acquisition, variations in customer types (new vs. returning), or costs associated with supporting free users in freemium models.
• It can lead to misinterpretations and inaccurate decisions, as seen in the example where a company overestimated CAC and mistakenly decided to discontinue successful channels.

Calculating True CAC: A Deeper Dive

To accurately calculate CAC, the article emphasizes the importance of considering three key questions.

Key Question #1: Time Between Expenses and Customer Acquisition

The article emphasizes the need to factor in the time lag between marketing and sales expenses and the actual acquisition of a customer. This is particularly crucial for freemium and SaaS businesses with longer sales cycles.

• By incorporating the average marketing and sales cycle into the calculation, businesses can avoid overestimating or underestimating CAC and make more informed decisions.
• The article provides a formula for calculating CAC that accounts for the time lag, considering both marketing and sales expenses over a specific period.

Key Question #2: What Expenses to Include

This section focuses on the importance of comprehensively including all relevant expenses in the CAC calculation.

• It highlights common mistakes, such as excluding salaries, overhead, and marketing and sales tools.
• The article discusses different scenarios, like freemium models (including product, engineering, and support expenses) and SaaS models (including customer success costs), and provides insights on how to handle these situations.
• It also addresses the challenge of separating expenses for new and returning customers, which is crucial for avoiding artificially low CAC figures.

Key Question #3: New Customers vs. Returning Customers

This section explores the importance of distinguishing between new and returning customers when calculating CAC.

• The article emphasizes that including both new and returning customers in the denominator while only considering expenses for new customers will distort CAC.
• It recommends either including all marketing and sales expenses, including those focused on retention, or separating expenses for new and reactivated customers and reflecting them in the denominator accordingly.

Recap: A Comprehensive Understanding of CAC

The article concludes by stressing that calculating true CAC requires a holistic approach that goes beyond a simple formula.

• It emphasizes the need to consider the length of the sales cycle, accurately identifying new customers, and factoring in all the costs associated with acquiring new customers.