If you’re focused on driving sales for your business, you no doubt keep your eye on a number of metrics. Hard numbers are essential for evaluating your ROI and making informed business decisions.

“How much does it cost me to close a customer? How much is that customer worth? Am I spending enough on marketing? Too much?”

These are the types of questions you have to keep in mind and regularly revisit.

Website, social, and sales analytics apps allow us to track countless metrics — like clicks, sessions, and bounce rate — making it easy to lose sight of the numbers that matter. We’ve grappled with the same problems, and after doing some work we’ve honed in on some of the most important metrics for helping you calculate the ROI of your work.

Below, we provide ROI formulas and explanation for calculating Customer Acquisition Cost (CAC) and Time to Payback Customer Acquisition Cost—two metrics that will tell you how much revenue each new customer is actually bringing your company.

Customer Acquisition Cost

Calculating CAC may cause you to regret all those dinners you took your prospect to.

What It Is

The CAC is a metric used to determine the total average cost your company spends to acquire a new customer.

How to Calculate It

Take your total sales and marketing spend for a specific time period and divide by the number of new customers for that time period.

• Sales and Marketing Cost = Program and advertising spend + salaries + commissions and bonuses + overhead in a month, quarter or year.
• New Customers = Number of new customers in a month, quarter or year.

Formula

Sales and marketing cost / new customers = CAC

Let’s Look at An Example:

Sales and Marketing Cost = $300,000

New Customers in a month = 30

CAC = $300,000 / 30 = $10,000 per customer

What This Means and Why It Matters

CAC illustrates how much your company is spending per new customer acquired. You want a low average CAC. An increase in CAC means that you are spending comparatively more for each new customer, which can imply there’s a problem with your sales or marketing efficiency.

Time to Payback CAC

What It Is

The Time to Payback CAC shows you the number of months it takes for your company to earn back the CAC it spent acquiring new customers.

How to Calculate It

You calculate the Time to Payback CAC by taking your CAC and dividing by your margin-adjusted revenue per month for your average new customer.

• Margin-Adjusted Revenue = How much your customers pay on average per month.

Formula

CAC / Margin-Adjusted Revenue = Time to Payback CAC

Let’s Look at An Example:

Margin-Adjusted Revenue = $1,000

CAC = $10,000

Time to Payback CAC = $10,000 / $1,000 = 10 Months

What This Means and Why It Matters

In industries where your customers pay a monthly or annual fee, you normally want your Payback Time to be under 12 months. The less time it takes to payback your CAC, the sooner you can start making money off of your new customers. Generally, most businesses aim to make each new customer profitable in less than a year.

Calculate Your ROI Like a Boss

In a sea of measurements, it can be difficult to keep your head above water. While CAC and Time to Payback CAC are important, they’re just two of the many metrics you can use to demonstrate the ROI of your work.

If you want to know more about the metrics that matter, download our free cheat sheet 6 Marketing Metrics Your Boss Actually Cares About. It covers the two ROI formulas we just discussed, along with four others that directly affect your bottom line.

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