What is the primary purpose of calculating Customer Acquisition Cost (CAC)?

The primary purpose of calculating Customer Acquisition Cost (CAC) is to evaluate marketing effectiveness. CAC represents the total cost of acquiring a new customer, which includes all expenses related to marketing and sales efforts. By understanding CAC, businesses can assess how effective their marketing strategies are in attracting and converting customers into paying clients.

When a company knows its CAC, it can compare this cost to the revenue generated from customers over their lifetime (often measured as Customer Lifetime Value, or CLV). This comparison helps companies make informed decisions about their marketing budgets and strategies. If CAC is too high relative to CLV, it may indicate the need to refine marketing approaches or enhance sales processes.

This calculation is crucial for startups and businesses seeking growth, as it impacts profitability and sustainability. Therefore, evaluating marketing effectiveness through CAC allows companies to optimize their customer acquisition strategies and ensure resources are allocated efficiently.