Your CAC Is Lying to You: A New Formula for Evaluating Ads

Unit Economics

Unit economics enables us to evaluate how efficiently a business operates from the standpoint of working with a customer. 

At its core lies the idea expressed by David Skok: a customer’s CLTV should exceed their CAC. At the same time, the CLTV concept inherently involves the use of cohorts, which, although useful, are often hard to interpret and apply, raising questions about the approach itself. 

 David Skok, when speaking about LTV, refers to it as the gross profit from a customer. I, however, use two separate terms to distinguish between actual and potential customers: CLTV — the gross profit from a customer, and LTV — the gross profit from a potential customer.

CAC refers to the cost of acquiring a customer but what exactly does that mean? Which expenses are included, and which are not? David Skok’s understanding of CAC was straightforward: take the budget spent on a cohort and divide it by the number of customers in that cohort.

CAC = AC / B 

This formula is valid, but it doesn’t help when it comes to making product improvement decisions, such as optimizing advertising campaigns. Moreover, initially, CAC was understood as the cost of first-time acquisition. However, in reality, a customer may interact with several campaigns not just between their first touchpoint and first purchase, but between any of their purchases. 

Additionally, a customer may engage with not only acquisition campaigns, but also retention and re-engagement campaigns. Should those costs be counted as acquisition-related, or assigned to retention budgets and thus excluded from CAC calculations? 

Even Ilya Krasinsky’s suggested shift from CAC/CLTV to CPA/LTV didn’t solve the issue of accounting for multiple ad interactions per user.