hey everyone eric here in this video we're gonna breakdown customer acquisition cost
by the end of this video you'll understand both how to calculate cac and its variations
as well as what digital marketers and venture capitalists are trying to understand when
they talk about cac specifically at startups that are scaling rapidly ok lets get started
so at a very high level customer acquisition cost we call it cac is just how much the company
needs to spend in advertising to get one new customer to buy for their first time and the
reason this is important is because if you know what your customer lifetime value is
and so this is basically all of the purchases on average will make during their lifetime
or their relationship with your company then you can compare that to your marketing costs
on that first order to try to figure out what's the maximum we can spend in marketing to bring
a new customer into the company and still make money on our relationship so let's say
you expect a customer to spend $1000 well then you know you know over a number of years
you know how much you can spend in marketing to try to get a new customer so its super
super important also you might think that cac is just total marketing costs divided
by total customers that's actually completely incorrect so let's walk through this right
now and just to jump to the finish before we start first off when people say cac they
are really referring to blended cac so we're gonna break that down right here as well as
some other cac versions that are important but you need to know that cac is blended cac
so here we are first off if you like this content please like this video and subscribe
to my channel it would really help me out and i'll keep making content like this okay
so to calculate cac you need two things you need your marketing costs which we have here
and then you need customer order information so total customers and um we also have total
orders and so like i said its not just taking your total marketing costs and dividing it
by total customers that's wrong so i'm gonna tell you right now what you actually need
to exclude so in marketing there's basically two buckets you have paid advertising so your
advertising channels facebook google could be amazon reddit pinterest radio television
anything where you pay for uh uh a customer like a new customer to get an ad put in front
of them sort of in any medium in any format where customers are advertised to you pay
for those placements so that's paid advertising and the other bucket is like other marketing
so stuff that's not related to actually putting ads in front of customers or what we could
call serving ads these are things like agencies like you'll probably hire like a lot of consultants
specialists who know how to run like facebook or pr or whatever it is but that's just compensation
you're just like paying them a fee um and then you'll have like marketing payroll so
your vp of growth or whatever it is like should you be including that the salary of a person
in how much it costs to acquire a new customer well the answer is no because that you know
salary that you pay someone does not go towards advertising to customers so you're trying
to figure out what's your paid advertising um because that is really the thing that's
bringing customers into your company and then when we look at the sales information theres
sort of two buckets you have customers which we call users in ecommerce and then you have
orders so a lot of people use orders to calculate their customer acquisition cost its completely
wrong do not do this you need to use customers so these are individual people that are making
purchases and the reason is that a typical customer will purchase multiple orders on
average so if they go to a grocery store or they go to amazon or they go to you know whatever
it is they will probably buy a couple things and so that will really distort your numbers
and make them make no sense at all so you need to look at the individual people and
then within that theres two buckets you have brand new customers which are people buying
something for the very first time with your company and then you have returning customers
which are people making subsequent purchases you need to exclude returning customers because
we're trying to figure out how much does it cost to get one new person to purchase and
if you include returning customers its gonna again its gonna distort that cost its gonna
make it look lower but uh so we need to exclude those people we need to exclude orders and
within new customers we have two basically main buckets so we have new customers from
paid channels um so these are people who came directly through paid advertising channels
and we can track that so we can see how many people clicked a google ad and then and then
purchased we can see how many people clicked a facebook ad and purchased or were advertised
on television and said hey you know come check out our company at whatever dot com slash
tv we can see how many people hit that page and then purchased so we can know how many
people came directly through these paid channels and then there are gonna be a bunch of customers
who come through what we call organic channels which are unpaid channels so things like coming
through google just by googling around and then coming to our website and purchasing
like that's free then you have things like referrals word of mouth most companies have
like around 40% of their sales coming through these untrackable channels that are just like
free channels so that's what organic customers are so you're going to just include all those
together and so for blended you want to look at ok what did you spend in advertising divided
by how many customers purchased for the first time and that's $80 and so we know that it
costs $80 to bring in one new customer so if we just copy this out I hit control c held
down shift tapped the right arrow right here and then control v copy paste so you can see
our customer acquisition cost it it went from $80 and then it went down into the 60s and
it went to 84 and you'd have to look at sort you know why oh look you know our organic
customers went to 100 and they went down and you know what's going on there of course dig
into all this stuff but another metric that's really important is paid customer acquisition
cost so this is basically just a measure of how well your paid channels are working so
you look at just your paid ads and you divide it by just your paid customers and so if we
hit control c copy um shift right arrow control v paste you can see that our paid customer
acquisition cost is sort of shifting around over time and going down a little bit and
so why do we want to look at these metrics and why do we want to look at them over a
period of time well of course we want to know is your business profitable on their relationship
with one customer but probably the most valuable thing you can find out about this is what
happens to your customer acquisition cost as you scale so the fear of most founders
venture capitalists startups ecomm companies etcetera is that your customer acquisition
costs start to go up really fast as you scale so um if you try to go from 1,000 customers
to 100,000 customers that your customer acquisition cost will skyrocket if you're a company if
you can prove that your customer acquisition cost stays stable as you grow then that basically
means that your future value could be absolutely enormous but if your customer acquisition
cost skyrockets in excess of your customer lifetime value then basically your business
will not be able to grow so a lot of the questions that companies are trying to figure out are
are around like how much can we scale our number of customers before our customer acquisition
cost you know goes up really fast so that's basically the main question that companies
are grappling with so i hope you learned a ton in this video about how to calculate the
customer acquisition cost by the way in the description below you can download this excel
file for free if you want to put in your own numbers from your own business and play around
with it i've also linked to some of my other startup and finance focused videos as well
like i have a video about the customer lifetime value and some other stuff on ecommerce check
those out in the description and if you found this content valuable please subscribe and
click the alerts notification like this video and leave me a comment below and also check
out my online courses if you need to improve your excel and finance skills that's all for
today thanks for watching and i'll see you in the next video