In trying to determine whether to countinue advertising through a certain channel, it helps to know what the "standard" is for how much should be spent per customer. Should it be 100% of net profit for the first sale? Should you be making profit even after accounting for the cost of acquiring the customer? How long should it take for a customer to become profitable?

To answer this, you need to have a working model for your customer LTV (Life Time Value). Most startups can't accurately estimate their LTV, so if you don't have good enough data, then building your CAC based on assumed LTV numbers can be fatal.

In this case, it's better to evaluate your CAC costs based on the months of revenue it takes to recover the cost to acquire the customer, and ultimately this calculation should be net of any costs associated with providing the service on a monthly basis and, even more conservatively allow for a healthy degree of churn.

Keep in mind that this calculation doesn't evaluate your true profitability only the capital efficiency of your customer acquisition spend.

Hope this helps. Happy to talk this through in more detail and with more specifics to your business.

Answered 9 years ago

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