How to calculate CAC for your store

There are two methods for working out cost of customer acquisition: a simple (but less accurate) way and a more complex way that involves many other variables.

Ultimately, there is only one way that is correct, which is the complex way. However, doing things the simple way is more useful than not doing them at all in order to get an idea of how different channels are performing in relation to each other.  

The simple method for working out CAC

Where:

CAC = Cost of customer acquisition

MCC = Total marketing campaign costs related to acquisition (Not retention)

CA = Total customers acquired

For example, let’s say you operate a company that’s been in business for three years. Working with your analytics and finance teams, you determine your average order value (p) is $50, your average customer buys from you twice a year (f), your gross margin is 20% (m) and your customer retention rate is 75% (r), meaning three out of four customers that buy from you once keep buying from you in the future. For simple math we’ll use a 10% discount rate (i). Based on your best information, your average customer buys from you for 2 years (t). Here’s the formula to calculate your Life Time Value.  Answer to this is $42.00.