Question 1

What is customer acquisition cost (CAC)?

Accepted Answer

Customer Acquisition Cost (CAC) is the total cost to acquire a new customer, calculated by dividing total marketing and sales expenses by the number of new customers acquired. Formula: CAC = Total Marketing Spend ÷ New Customers. Example: Spending $10,000 to acquire 250 customers = $40 CAC. This metric helps determine if your acquisition strategy is sustainable and profitable.

Question 2

How do you calculate customer lifetime value (CLV or LTV)?

Accepted Answer

Customer Lifetime Value (CLV/LTV) is the total profit a customer generates during their relationship with your business. Formula: CLV = (Average Order Value × Purchase Frequency × Customer Lifetime in Months) × Profit Margin. Example: $75 AOV × 0.5 purchases/month × 24 months × 40% margin = $360 CLV. This predicts the total value you can expect from each customer acquisition.

Question 3

What is a good LTV:CAC ratio?

Accepted Answer

A good LTV:CAC ratio varies by business model but generally: 3:1 or higher is ideal for most e-commerce (sustainable growth with healthy margins), 2:1 to 3:1 is acceptable but tight (limits reinvestment and growth), Below 2:1 is concerning (unprofitable or very thin margins), 5:1+ is excellent (strong unit economics for aggressive scaling). SaaS typically targets 3:1+, while e-commerce can work with 2:1+ if volume is high.

Question 4

How do you calculate payback period?

Accepted Answer

Payback period is how long it takes to recover customer acquisition costs through profit. Formula: Payback Period (months) = CAC ÷ (Monthly Revenue per Customer × Profit Margin). Example: $40 CAC ÷ ($75 × 0.5 × 40%) = 2.7 months. Shorter payback periods (under 6 months) are ideal as they reduce cash flow pressure and enable faster scaling. Longer payback (over 12 months) requires more working capital.

Question 5

What costs should be included in CAC calculation?

Accepted Answer

Include all costs directly related to acquiring customers: 1) Advertising spend (Google Ads, Facebook Ads, etc.), 2) Agency or consultant fees, 3) Marketing software and tools, 4) Content creation costs, 5) Sales team salaries (if applicable), 6) Marketing team salaries proportionally allocated. Don't include: general overhead, product development, or customer service costs. Be comprehensive but avoid inflating with indirect costs.

Question 6

How can I reduce customer acquisition cost?

Accepted Answer

Reduce CAC through: 1) Improve conversion rates (better landing pages, clearer value props, social proof), 2) Better targeting (focus on high-intent audiences, exclude poor performers), 3) Optimize ad creative (A/B test, use customer testimonials, show products in use), 4) Improve quality score (for search ads), 5) Build organic channels (SEO, content marketing, social media), 6) Implement referral programs (customers acquire customers), 7) Retargeting campaigns (convert warm traffic). Each 10% CAC reduction significantly improves unit economics.

Question 7

How can I increase customer lifetime value?

Accepted Answer

Increase CLV by: 1) Boost purchase frequency (email marketing, loyalty programs, subscriptions), 2) Increase average order value (bundles, upsells, cross-sells), 3) Improve retention (better product quality, customer service, engagement), 4) Extend customer lifetime (subscription models, replenishment programs), 5) Expand product line (more reasons to return), 6) Personalization (relevant recommendations increase purchases), 7) VIP/membership programs (encourage repeat purchases). Focus on retention as it's more profitable than acquisition.

Question 8

What's the relationship between CAC and profit margins?

Accepted Answer

Higher profit margins allow for higher CAC while maintaining profitability. With 70% margins (like software), you can spend more on acquisition than with 30% margins (like retail). Formula: Maximum Sustainable CAC = (CLV × Gross Margin) ÷ Target LTV:CAC Ratio. Example: With $360 CLV and 40% margin at 3:1 target = max $48 CAC. Low-margin businesses must be more aggressive about reducing CAC or must achieve very high volume to be profitable.

Question 9

How does CAC vary by acquisition channel?

Accepted Answer

CAC varies significantly by channel: Organic Search (SEO): $5-30 (low ongoing cost, high upfront), Email Marketing: $5-20 (requires existing list), Paid Social: $15-60 (varies by product and targeting), Paid Search: $20-50 (high intent but competitive), Influencer: $25-100+ (depends on influencer quality and fit), Affiliate: $30-80 (includes commission), TV/Traditional: $50-200+ (brand building with high CAC). Test multiple channels and scale the most efficient ones for your business.

Question 10

When should I scale customer acquisition spending?

Accepted Answer

Scale acquisition spending when: 1) LTV:CAC ratio is 3:1 or better consistently, 2) Payback period is under 12 months (ideally under 6), 3) Unit economics are proven across multiple cohorts, 4) Customer retention rates are stable and predictable, 5) You have sufficient working capital for the payback period, 6) Channel performance is consistent (not a one-time outlier). Scale gradually (20-30% increases monthly) and monitor for efficiency degradation. Stop scaling if LTV:CAC drops below 2:1.

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