If you have a reasonable customer acquisition cost (CAC) ratio, it means that your profit on these same clients more than compensates the money invested in acquiring customers. In this article, you will learn how to calculate recovery.
You have to spend money upfront on customer acquisition in a subscription business, and revenue will come over time. Once the profit from customers exceeds what was spent acquiring them (known as break-even), then Customer Acquisition Cost has been recovered.
It is essential to understand that if you have no margin, then the only way for a company to recover the CAC payback period would be through high revenue. This strategy requires a large amount of gross profit for this strategy to work.
How to calculate Recovery in Months for CAC?
Single customer
If you spend $2,000 to acquire a new customer that pays an annual fee of $200 with a 40% gross margin
If you are not recovering CAC in a reasonable amount of time, your business is at risk. The sooner it can be retrieved, the better your company because this means less financial risks and more customer satisfaction.
You can calculate customer acquisition cost by dividing the amount of money spent on acquiring a new customer, called CAC, with that month’s gross margin from monthly subscriptions.
Gross Margin divided by Months to Recover CAC equals the amount of time it takes for gross margin to pay back.
All your customers
For this second example, let’s say you want to calculate how much a single customer would cost your company.
To find out what your employees need, you should look at three things:
- CAC (Customer Acquisition Cost): the amount of money it costs to acquire new customers.
- ARPA (Avg Revenue per Account): the average revenue you have from your customers;
- GM % (Gross margin): the percent of the company’s total sales revenue after incurring the direct costs associated with producing the goods and services.
The time it takes to recover a company’s cost of customer acquisition is equal to the CAC divided by (ARPA * GM%).
