CAC is misleading, compute the Full Customer Cost.
It’s widely discussed the fact that acquiring new customers online has a cost (CAC) and, through the exploitation of the customer’s LTV, we pay back the customer acquisition costs and bear all the other fixed and overhead costs.
You can also check out some thoughts of mine about how LTV - CAC is meaningful just with the related estimation error.
Apart from that, the classic idea of evaluating the business profitability/scalability using LTV – CAC is missing a key point: once you have spent the CAC for acquiring a new customer, you have to spend other money to turn him into a repeat customer who generates the LTV over time.
Customer base marketing and sales context
Once a new customer is acquired, you should move him forward along a codified, automated marketing & sales path to turn the first-time customer into a repeat customer.
The path is wired within a technological solution which helps you keep track and automate the process.
Such technological solution leads to other direct cost and, to be more specific, it turns that every first-time customer has a monthly/yearly marketing & sales cost to become a repeat customer.
So, it’s better to know it. Because this cost should be added to the CAC (the customer acquisition cost), otherwise the LTV couldn’t be fully generated.
The real growth metric
Let’s call CMC (Customer Marketing Cost) the cost of doing marketing & sales campaigns over first-time customers to turn them into repeat ones.
In the CMC there are only direct technological costs. Your time as entrepreneur or the time of marketing & sales people in the company, for this analysis, are considered non-directly attributable costs.
So, the real growth metric is LTV – CAC – CMC or LTV / (CAC + CMC).
And we now go to see how CMC affects your profitability.
Reference tool and related cost
To approach the analysis, we need to select a technological solution and use its related costs to get to the point.
We chose Infusionsoft, the leading solution for small businesses. Infusionsoft allows you to consistently manage customer relationships in one place, automating most of the operations. Right what we need in the context we set.
Infusionsoft’s pricing is straightforward. The plan with e-commerce functionalities considered in the analysis, paid on a yearly basis, has the following price scheme.
|up to 500 contacts||€158 /month|
|up to 1.000 contacts||€188 /month|
|up to 2.500 contacts||€238 /month|
Now that we defined the technological costs, we can investigate further our CMC.
The aging customer
Based on how many customers we have in our customer base, we have to pay a certain amount of money per month (in the case of Infusionsoft, it should be committed for 12 months).
This figure can be translated in a cost per customer.
This means that, while the first-time customer ages, the CMC grows month over month.
And the growth of the CMC reflects the increase of the LTV. The CAC is useful for closing the first sale, the CMC is needed to close all the repeat sales we expect.
Customer Marketing Cost (CMC), here we are
Let’s have a look at the numbers behind what we described above.
At t0 we have the customer acquisition cost, figure increasing quarter by quarter because of the technological expenses to run “upselling” campaigns.
With a small customer base, CMC has a non-negligible impact on the LTV while for larger customer bases the CMC becomes negligible (when you have costs similar to Infusionsoft’s).
With a small customer base, CMC may be as big as the CAC.
Therefore, the size of the business you expect to reach should be the main driver of choice for your technological solution in charge of helping you in managing the customer lifecycle.