Understanding Acquisition Metrics
Acquisition metrics help you understand how effectively you're acquiring new customers and at what cost. These metrics are crucial for optimizing your marketing spend and growth strategies.
Customer Acquisition Cost (CAC)
CAC measures how much it costs to acquire a new customer, including all marketing and sales expenses.
CAC = (Total Marketing + Sales Costs) / Number of New Customers Acquired
Example:
If you spend $10,000 on marketing and sales in a month and acquire 100 new customers:
CAC = $10,000 / 100 = $100 per customer
Lifetime Value (LTV)
LTV estimates the total revenue a business can expect from a single customer throughout their relationship.
LTV = Average Purchase Value × Purchase Frequency × Customer Lifespan
Example:
If a customer spends $100 per purchase, buys 4 times per year, and remains a customer for 3 years:
LTV = $100 × 4 × 3 = $1,200
LTV:CAC Ratio
This ratio compares the lifetime value of a customer to the cost of acquiring them, indicating the return on your customer acquisition investment.
LTV:CAC Ratio = LTV / CAC
Example:
If your LTV is $1,200 and your CAC is $300:
LTV:CAC Ratio = $1,200 / $300 = 4:1
CAC Payback Period
This metric shows how long it takes to recover the cost of acquiring a customer.
CAC Payback Period = CAC / (Monthly Revenue per Customer × Gross Margin)
Example:
If your CAC is $300, monthly revenue per customer is $50, and gross margin is 60%:
CAC Payback Period = $300 / ($50 × 0.6) = 10 months
Viral Coefficient
This measures how many new users an existing user brings to your product or service through referrals.
Viral Coefficient = Average Number of Referrals per User × Conversion Rate
Example:
If each user refers 5 people on average, and 20% of those convert to users:
Viral Coefficient = 5 × 0.2 = 1.0
Best Practices for Acquisition Metrics
- Track CAC by channel: Understand which acquisition channels are most cost-effective.
- Compare LTV to CAC: Aim for an LTV:CAC ratio of at least 3:1 for a healthy business model.
- Monitor CAC Payback Period: Ideally, recover your CAC within 12 months or less.
- Optimize for viral growth: A viral coefficient greater than 1 indicates exponential growth potential.
- Segment by customer type: Different customer segments may have different acquisition costs and lifetime values.
When to Use Each Metric
Different acquisition metrics are appropriate for different business questions:
- CAC: Use when evaluating marketing efficiency and comparing acquisition channels.
- LTV: Use when determining how much you can afford to spend on acquisition and retention.
- LTV:CAC Ratio: Use when assessing the overall health of your business model.
- CAC Payback Period: Use when managing cash flow and evaluating the time to profitability.
- Viral Coefficient: Use when measuring the effectiveness of your referral program or viral growth potential.