How much does it cost to close a customer? How much is that customer worth? Am I spending too much or too little on marketing?

These are the types of questions you have to keep in mind and regularly revisit as a small business owner. Hard numbers are essential for evaluating your return on investment (ROI) and making informed business decisions.

But while website, social, and sales analytics apps allow us to track countless metrics—like clicks, visits, and conversions—sifting through the data to find the actual answers to the questions above can feel overwhelming. As a small business, we’ve grappled with the same problems. Over the years, we’ve honed in on some of the most important metrics you need to track to understand the overall ROI of your work.

In this blog, we dig into two of those key metrics: Customer Acquisition Cost (CAC) and Time to Payback Customer Acquisition Cost.

Metric 1: Customer Acquisition Cost

Calculating CAC may cause you to regret all those dinners you took your prospect to.

What It Is

The CAC is a metric used to determine the total average cost your company spends to acquire a new customer.

How to Calculate It

Take your total sales and marketing spend for a specific time period and divide it by the number of new customers for that time period.

• Sales and Marketing Cost = program and advertising spend + salaries + commissions and bonuses + overhead for a specific duration of time (month, quarter, or year).
• New Customers = number of new customers in that specific duration of time (month, quarter, or year).Formula

Forumula

Sales and marketing cost / new customers = CAC

Let’s Look at An Example:

Sales and Marketing Cost = $300,000
New Customers in a month = 30
CAC = $300,000 / 30 = $10,000 per customer

What This Means and Why It Matters

CAC illustrates how much your company is spending per new customer acquired. You want a low average CAC. An increase in CAC means that you are spending comparatively more for each new customer, which can imply there’s a problem with your sales or marketing efficiency.

Metric 2: CAC Payback Period

What It Is

The CAC Payback Period shows you the number of months it takes for your company to earn back the CAC it spent acquiring new customers.

How to Calculate It

You calculate the CAC Payback Period by taking your CAC and dividing by your margin-adjusted revenue per month for your average new customer.

• Margin-Adjusted Revenue = How much your customers pay on average per month.

Formula

CAC / Margin-Adjusted Revenue = CAC Payback Period

Let’s Look at An Example:

Margin-Adjusted Revenue = $1,000
CAC = $10,000
Time to Payback CAC = $10,000 / $1,000 = 10 Months

What This Means and Why It Matters

In industries where your customers pay a monthly or annual fee, you normally want your Time to Payback to be under 12 months. The less time it takes to pay back your CAC, the sooner you can start making money off of your new customers. Generally, most businesses aim to make each new customer profitable in less than a year.

Calculate Your ROI Like a Boss

In a sea of measurements, it can be difficult to keep your head above water. While CAC and CAC Payback Period are important, they’re just two of the many metrics you can use to demonstrate the ROI of your work. The trick is understanding what metrics are most important to your business’s success.

Not sure what those marketing metrics are? Give us a call—we’re happy to provide some context for what you should be looking for to help your business shine!