There are two different types of CAC, and unfortunately, people now often use the term interchangeably, as confirmed in a recent Inc. article.
True CAC is an accounting term that includes ALL expenses related to customer acquisition—even the marketing employee salaries—basically, a fully-loaded version.
However, CAC is now more commonly used to represent solely the advertising/media costs required to acquire a customer (replacing the old CPA term) and is the primary definition used in capital-raising efforts, by VCs and by those brands using direct-to-consumer channels.
The fully-loaded CAC also does not present an initial apples-to-apples comparison when VCs are looking at different brands' LTV(customer lifetime value):CAC ratios.
Ideally, the LTV:CAC ratio should be 3:1, which means a brand should make 3x in LTV vs. what it cost to acquire that customer. Typically, if the ratio is less than 3:1, the brand is not doing well.
When looking at how else to improve a brand’s LTV:CAC ratio, most brands also don’t look at the whole picture and focus all of their efforts on further decreasing CAC. While that is absolutely necessary (and ever more challenging), the LTV:CAC ratio can also be improved by increasing LTV.
Many brands just plug in their LTV as a set number, thinking it cannot be changed much. However, there are a multitude of hidden opportunities to improve LTV most brands don’t know or think about.
What are some of the better ways to increase customer LTV?
- Make sure the brand’s pricing strategy makes sense across the board
- Increase the average order value (AOV) of a new customer’s initial purchase
- Increase upsells and cross-sells throughout the customer’s lifecycle
- Add a subscription/membership program to increase recurring revenue
- Improve “credit processing rules” to decrease declined payments and involuntary cancels
- Create a more engaging, more relevant, “sticky” customer experience
- Create a “best customer profile” to optimize acquisition segmentation
- Develop a sophisticated reactivation or winback program for inactive or canceled customers
- And, more…
With the right CAC calculation and by increasing the customer’s LTV, an LTV:CAC ratio can improve significantly.
What is your LTV:CAC ratio? If you need help improving it, we're happy to help!
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The CMO Syndicate is a diverse group of world-class Chief Marketing Officers who rapidly solve growth and profit problems for CEOs, VCs, CMOs, and PE firms. As global CMOs from the world’s top companies, The CMO Syndicate is not a traditional marketing consulting agency, and we are not typical marketing or growth consultants. We are growth experts and operators who actually do the work on a part-time or project basis as outsourced fractional and interim CMOs.