10. Cost To Acquire A Customer CAC | $100M Lost Chapters Audiobook
In this episode of The Game, Alex Hormozi breaks down the complexities of Customer Acquisition Cost (CAC), explaining how businesses often make costly mistakes by overlooking key expenses beyond basic advertising spend. Through detailed examples of different marketing channels, he demonstrates how seemingly minor miscalculations in CAC can significantly impact a company's profitability—potentially affecting monthly earnings by millions of dollars.
Hormozi examines three main marketing approaches—outreach, content, and paid advertising—and their associated costs, from software expenses to employee salaries and commissions. He outlines strategies for identifying the most cost-effective marketing channels and explains how businesses can maintain profitability while outspending competitors by focusing on customer lifetime value through improved retention and sales techniques.
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1-Page Summary
Understanding Customer Acquisition Cost (CAC)
Alex Hormozi emphasizes that many entrepreneurs underestimate the complexity of Customer Acquisition Cost, often focusing solely on ad spend while overlooking other crucial costs like software, sales commissions, and payroll. He notes that even small miscalculations in CAC can have dramatic effects on profitability, potentially making the difference between earning $1 million versus $10 million monthly.
Breaking Down CAC Across Marketing Channels
Different marketing strategies come with varying customer acquisition costs. For outreach marketing, combining email software costs, salesperson salary, and commissions might result in a CAC of $500 per customer. Content marketing, which includes media team payroll and commissions, could lead to a CAC of $1,100 per customer. Paid advertising, incorporating media buyer salary, ad spend, software, and commissions, might result in a higher CAC of $3,500 per customer.
Optimizing CAC and Lifetime Gross Profit
Hormozi advises businesses to identify and focus on their most cost-effective marketing channels to lower overall CAC. Once CAC is optimized, he recommends shifting focus to increasing Lifetime Gross Profit (LTGP) per customer through improved retention, upselling, and cross-selling strategies. This approach enables businesses to outspend competitors in customer acquisition while maintaining profitability.
1-Page Summary
Additional Materials
Clarifications
- Customer Acquisition Cost (CAC) is the total expense a business incurs to gain a new customer. It includes all marketing, sales, and operational costs directly tied to acquiring customers, not just advertising. This can cover salaries, software tools, commissions, and other overheads related to customer acquisition efforts. Accurately calculating CAC helps businesses understand the true cost of growth and profitability.
- "Software" refers to tools used for marketing and sales, like email platforms or CRM systems. "Sales commissions" are payments made to salespeople based on the customers they acquire. "Payroll" includes salaries and benefits for employees involved in marketing and sales efforts. These costs add up beyond just ad spending and impact the true expense of acquiring a customer.
- Lifetime Gross Profit (LTGP) measures the total profit a business earns from a customer over the entire duration of their relationship, before deducting fixed costs. It differs from simple profit metrics that often focus on a single transaction or short-term period. LTGP accounts for repeat purchases, upsells, and cross-sells, reflecting the long-term value of a customer. This metric helps businesses understand how much they can invest in acquiring and retaining customers profitably.
- Outreach marketing involves direct communication with potential customers, often through emails or calls, requiring tools like email software and sales staff. Content marketing creates valuable media such as blogs or videos, needing a media team to produce and manage this content. Paid advertising uses paid channels like social media ads or search engine ads, involving media buyers who manage ad campaigns and budgets. Each role incurs specific costs like salaries, commissions, and software fees tied to their activities.
- Commissions are typically calculated as a percentage of the sales revenue generated by a salesperson. They are included in CAC because they represent a direct cost tied to acquiring each new customer. Including commissions ensures the total expense of gaining customers is accurately measured. This helps businesses understand the true cost of their sales efforts.
- A media buyer is responsible for purchasing advertising space and time to reach target audiences effectively. Their salary reflects the cost of this specialized skill in negotiating and optimizing ad placements. The media team payroll includes all staff involved in creating, managing, and executing marketing content and campaigns. These personnel costs contribute to the overall expense of acquiring customers beyond just the ad spend itself.
- Retention means keeping customers over time, which increases the total revenue they generate. Upselling involves encouraging customers to buy a more expensive version of a product or service. Cross-selling is offering related or complementary products to existing customers. Together, these strategies raise the Lifetime Gross Profit by increasing the value gained from each customer beyond the initial sale.
- Small miscalculations in CAC can lead to underestimating the true cost of acquiring each customer. This causes businesses to overspend on marketing without realizing they are losing money per customer. Since profitability depends on the difference between revenue and acquisition cost, even slight errors compound over many customers. Over time, this can turn a profitable business into an unprofitable one.
- Outspending competitors on customer acquisition means investing more money to attract customers than they do. This is only sustainable if the profit earned from each customer over time (lifetime gross profit) exceeds the acquisition cost. By optimizing retention and upselling, a business increases the total value gained from each customer. This allows spending more upfront without losing overall profitability.
Counterarguments
- While focusing on ad spend is common, not all entrepreneurs neglect other costs associated with CAC; some may have a comprehensive understanding and still face challenges in managing CAC effectively.
- The impact of miscalculations in CAC on profitability can vary widely depending on the scale of the business and the industry; the $1 million to $10 million example may not be applicable to all businesses.
- The average CAC for different marketing channels can fluctuate greatly based on industry, target market, and the effectiveness of the marketing strategies employed, so the provided averages may not be universally applicable.
- The suggestion to focus on the most cost-effective marketing channels doesn't account for the potential long-term value of building a diverse marketing strategy that can adapt to changing market conditions.
- Improving LTGP is important, but focusing too heavily on upselling and cross-selling without considering customer satisfaction and value can lead to negative customer experiences and brand damage.
- The ability to outspend competitors on customer acquisition is not solely dependent on optimizing CAC and LTGP; market conditions, competitor strategies, and brand positioning also play significant roles.
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Importance Of Knowing Customer Acquisition Cost (CAC)
Alex Hormozi explains that many entrepreneurs overlook the true complexity of Customer Acquisition Cost, often to the detriment of their business's profitability.
Minimize CAC to Significantly Impact Profitability
Hormozi points out that entrepreneurs often make the mistake of underestimating their true CAC. They may focus only on ad spend while ignoring other significant costs such as software, sales commissions, and payroll associated with acquiring new customers.
Calculating CAC Is Crucial: A Small Difference Can Mean $1 Million vs. $10 Million per Month
Understanding and accurately calculating CAC is critical for businesses, according to Hormozi. A slight misjudgment or miscalculation ...
Here’s what you’ll find in our full summary
Importance Of Knowing Customer Acquisition Cost (CAC)
Additional Materials
Clarifications
- Customer Acquisition Cost (CAC) is the total expense a business incurs to gain a new customer. It includes all marketing, sales, and operational costs related to attracting and converting prospects. CAC helps businesses measure the efficiency of their customer acquisition strategies. Lowering CAC while maintaining customer quality improves overall profitability.
- Customer Acquisition Cost (CAC) directly affects how much profit a business makes from each customer. If CAC is too high, the business spends more to gain customers than it earns from them, reducing profitability. Lowering CAC means more profit per customer, improving overall business health. Accurately knowing CAC helps allocate marketing budgets to the most cost-effective strategies.
- Customer Acquisition Cost (CAC) includes all expenses directly related to gaining new customers, not just advertising. This can involve software tools used for marketing automation or customer relationship management. Sales commissions paid to employees who close deals are also part of CAC. Additionally, payroll costs for marketing and sales staff contribute to the total CAC.
- A small error in CAC calculation can mislead a business about its true profitability per customer. If CAC is underestimated, a company might overspend on acquiring customers, reducing overall profit margins. Conversely, accurate CAC helps optimize marketing spend, scaling growth efficiently. This optimization can exponentially increase monthly revenue, explaining the large difference between $1 million and $10 million.
- To accurately calculate Customer Acquisition Cost (CAC), sum all marketing and sales expenses over a specific period, including ad spend, salaries, software, and commissions. Then, divide this total by the number of new customers acquired during the same period. This method ensures all relevant costs are accounted for, providing a true measure of acquisition efficiency. Tracking CAC over time helps identify trends and optim ...
Counterarguments
- While minimizing CAC is important, focusing solely on reducing CAC might lead to sacrificing the quality of customer service or the value of the product, which can harm the business in the long term.
- Overemphasis on CAC might lead to underinvestment in other critical areas such as product development, employee training, or customer retention strategies.
- The relationship between CAC and profitability is not always linear; some businesses may require a higher CAC to acquire customers who have a higher lifetime value (LTV), which could be more profitable over time.
- The assertion that a small miscalculation in CAC can lead to a tenfold difference in revenue ($1 million vs. $10 million) may not account for other variables that can affect revenue, such as market conditions, product demand, and competitive dynamics.
- While it's important to calculate CAC accurately, it's also crucial to understand that CAC is just one metric among many. Businesses should also consider metrics like customer lifetime value (CLV), return on investment (ROI), and others to get a comprehensive view of their financial health.
- Some businesses, particul ...
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Calculating CAC for Outreach, Content Marketing, Paid Ads
When planning a digital marketing strategy, a critical measure to account for is the Customer Acquisition Cost (CAC), which encompasses all the expenses associated with earning a new customer. Below we discuss how to calculate CAC for various marketing strategies, such as outreach, content marketing, and paid advertising.
Outreach Model CAC: Email Software, Salesperson Salary, Commissions
Total CAC for 8 Customers: $4,000 ($500 Each)
The outreach model's CAC is defined by the sum of the costs incurred through various resources such as email software, salesperson salary, and commissions. For instance, if these combined expenses total $4,000 to acquire 8 new customers, the CAC for each customer would be $500.
CAC Includes Media Team Payroll and Commissions
Example: $11,000 CAC for 10 Customers, or $1,100 Each
In content marketing, the CAC extends to the media team's payroll and sales commissions. If two media team members are each paid a monthly salary of $5,000, and they create content that brings in 10 customers, with an additional $100 commission per sale, the total CAC is $11,000. This means the CAC for each customer is $1,100.
Paid Advertising CAC: Sal ...
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Calculating CAC for Outreach, Content Marketing, Paid Ads
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Counterarguments
- The calculation of CAC should also consider the lifetime value of a customer (LTV) to determine the true return on investment, which is not mentioned in the text.
- The examples provided do not account for the indirect costs such as overhead, technology infrastructure, or other operational expenses that may contribute to the true CAC.
- The text assumes a direct and simple relationship between marketing efforts and customer acquisition, which may not account for the complexities of customer behavior and the influence of external factors.
- The examples given do not consider the quality of customers acquired; acquiring more customers at a lower CAC is not necessarily better if those customers do not contribute significantly to revenue.
- The text does not address the scalability of the marketing strategies; some strategies may have diminishing returns as they scale, affecting the CAC over time.
- The text simplifies the allocation of salaries and commissions to CAC without considering that these employees may be involved in multip ...
Actionables
- You can analyze your own spending habits by categorizing expenses and calculating your personal "Customer Acquisition Cost" for services you subscribe to. For instance, if you're trying to decide between different streaming services, calculate how much you're spending on each service's subscription fees, any additional costs like internet upgrades for better streaming, and divide by the number of months you expect to use the service. This will give you a clear idea of which service is more cost-effective for you in the long run.
- Create a simple spreadsheet to track the effectiveness of your personal investments in learning new skills, similar to tracking Content Marketing CAC. For example, if you're paying for online courses or buying books to learn a new language, record the costs and time spent, and set a goal for fluency. As you progress, you can calculate the cost per level of proficiency achieved, helping you to decide whether to continue investing or try different learning methods.
- Experiment with budget allocatio ...
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Optimizing CAC and Increasing LTGP Per Customer
Business efficiency often relies on understanding and optimizing customer acquisition cost (CAC) and lifetime gross profit (LTGP) per customer. Alex Hormozi provides insights on achieving this.
Identify Cost-Effective Marketing Channels After Calculating Your CAC
Boost Top Channels to Lower CAC
Hormozi stresses the importance of concentrating marketing efforts on channels that yield the best CAC. By identifying and bolstering these top-performing channels, businesses can lower their overall CAC effectively.
Optimized CAC? Pay More per Customer Than Competitors By Increasing LTGP
Once the CAC is optimized and cannot be reduced further, Hormozi suggests that the focus should shift to increasing the LTGP. This strategy will allow the business to spend more per customer than its competitors, ensuring better customer acquisition and long-term profitability.
Boosting LTGP: Enhance Retention, Upsell, ...
Here’s what you’ll find in our full summary
Optimizing CAC and Increasing LTGP Per Customer
Additional Materials
Clarifications
- Customer Acquisition Cost (CAC) is the total expense a business incurs to attract and convert a new customer. It includes marketing, sales, and any other related costs. Understanding CAC helps businesses measure the efficiency of their marketing efforts. Lowering CAC while maintaining quality customers improves profitability.
- Lifetime gross profit (LTGP) per customer is the total profit a business earns from a customer over the entire duration of their relationship, before deducting fixed costs. It includes all purchases, upsells, and cross-sells made by the customer. LTGP helps businesses understand the long-term value of acquiring and retaining customers. This metric guides decisions on how much to invest in acquiring and servicing customers profitably.
- Optimizing CAC is important because it directly affects how much a business spends to gain each new customer. Lower CAC means the company uses its marketing budget more efficiently, increasing profitability. High CAC can drain resources and reduce the return on investment from marketing efforts. Efficient CAC management helps sustain growth by balancing acquisition costs with customer value.
- A marketing channel is a platform or method a business uses to reach potential customers. Examples include social media ads, email campaigns, search engine marketing, and influencer partnerships. Each channel has different costs and effectiveness in attracting customers. Choosing the right channels helps optimize customer acquisition cost.
- To identify effective marketing channels, track where your customers come from using tools like Google Analytics or CRM software. Measure the cost spent on each channel and the revenue or customers gained from it. Calculate the CAC for each channel by dividing the total cost by the number of customers acquired. Compare these CAC values to find which channels deliver customers most efficiently.
- Spending more per customer than competitors is viable when lifetime gross profit (LTGP) is higher, ensuring overall profitability despite higher acquisition costs. This approach allows capturing greater market share by outbidding competitors for valuable customers. Higher LTGP means the business recoups acquisition e ...
Counterarguments
- While focusing on top-performing channels can lower CAC, it may also lead to over-reliance on a limited number of channels, which can be risky if those channels become less effective or more competitive over time.
- Optimizing CAC does not always mean it cannot be reduced further; there may be innovative or emerging marketing strategies and technologies that could lower CAC even more.
- Spending more per customer than competitors is not always a sustainable strategy, especially for smaller businesses or those with limited capital; it may not be feasible for all businesses to increase LTGP to the point where they can outspend competitors.
- Enhancing LTGP through retention, upselling, and cross-selling is important, but focusing too much on these areas can lead to customer fatigue or pushback if customers feel they are being sold to aggressively.
- The strategies for increasing LTGP may not apply equally across different industr ...
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