Last week we went deep on how to properly calculate CAC. This week, I wanted to share 7 brutal truths I’ve learned about CAC over a decade in Marketing Data Science.

Let’s go!

Whenever I advise companies, the first question I ask is “What is your CAC?”. The second question is “What is your lifetime value?”.

You should never look at CAC in isolation. Without a corresponding value metric, you can not understand the efficiency of your marketing.

Without context, there’s no such thing as a good CAC or a bad CAC.

Only a dangerously misunderstood metric that will come back to haunt you.

I just hosted a podcast guest who specializes in marketing measurement helping companies set up better tracking and conversions. She's been doing this for 9 years and said something something that I will now repeat every day when I wake up in the morning 10x before getting out of bed.

“The ad platform conversions and data is about helping the ad platforms target and convert better. It’s not for you. You need to use something else to measure how these campaigns are performing.”

Why is this? It's important to remember that the platforms that sell ads have one objectives which is to convince you to spend more money on ads through them. You would think that their best way to do that is to tell you the truth. It should be but it’s not.

But here's the real challenge: What is the truth? They’re not lying when they say “Based on the information you’ve provided to us, this person clicked / saw our ad and then converted on your platform.” They've taken the road of showing you numbers that are defensible AND in their best interest. It's why you see things like enhanced conversions or quantitative attribution modeling or whatever the new terminology that they've used might be.

The point is, don't trust their numbers. They're good for optimizing the channel and seeing relative differences in channel over time, but should not be your source of truth.

Just like platform numbers aren't fully accurate, neither is any attribution model that you're using. I’ve been burned by this so many times that it’s now why I highly recommend just using Blended CAC.

Blended CAC can not be manipulated or fudged. It is the undeniable truth.

Here's a real-life example I've seen that can show you the power of just using blended CAC:

If your CAC 2X when you double the budget, that means there is no incremental impact or a very imperceptible one.

Now, if your spend doubles and your CAC goes up let’s say 1.25x or 1.5x then you can see that there’s some impact (albeit not efficient). Blended CAC was still able to tell you this.

The counter-argument is going to be, "Shouldn’t we use more sophisticated things like MMM, etc.?".

Yes, if you have that resource available to you, then do it. But companies aren’t using MMMs to make daily decisions. The people running the channels are using platform metrics while the people leading Marketing functions still report using Monthly CAC numbers.

I’ve spent so much of my career trying to solve the problem by first looking at external benchmarks, but in almost every situation you realize that benchmarks don't work. There are simply too many variables going on at once to use one cohesive benchmark.

A good example is this notion of having a LTV to CAC of 3:1. I've done a lot of research, and I can't understand what LTV they’re talking about. Is this a 1 year, 2 year or 3 year LTV? How are they calculating LTV? Using gross margin or contribution margin And does this hold with all marketing structures? Does it hold with all business models?

It's not clear. I've now learned that benchmarks are completely useless.

At the end of the day, you want to find the sweet spot of CAC and LTV that satisfies your businesses criteria for balancing growth and profitability. If your strategy is to prioritize growth then allow for higher CAC. If it’s to head towards profitability then allow for a lower CAC, but either way benchmarks are useless.

CAC tells you the cost of acquisition. Payback tells you how fast you get it back. They are not competing metrics. They are complementary.

Here’s a made up example. Would you rather:

Let’s do the math.

Assume you have a total of $1000 marketing budget. That’s it.

With a 3 month payback @ $250 CAC, you can acquire 16 customers per year. How?

By the end of the year, you’ve acquired 16 customers.

Now, let’s look at the other company that has a 12 month payback @ $100 CAC.

Company 1 has 16 customers. Company 2 has 10.

In general, 16 customers > 10.

Now play that out over a long time and clearly the 3 month payback has a structural advantage.

CAC gets dumped into the Marketing metrics bucket, but it’s a company-wide metric. UX influences activation (and therefore CAC). Pricing influences conversion (and therefore CAC). Regardless of how much creative testing and optimization you do if the landing page doesn’t resonate, you’re f*cked.

So, at some point if you feel like you’ve hit a limit on your ability to improve CAC as a Marketing team you MUST loop in product (in fact the sooner the better). Better yet, it should be Product + Marketing from the start.

If you do absolutely nothing, CAC will always go up for 2 very important reasons:

If you’re building a growth model and it assumes flat CAC over time, you’re lying to yourself.

Here it is: Ultimate Guide to CAC Part 1: Understanding CAC