Tips and tricks to maximize your profitability.
As a digital creator selling courses, digital downloads, blogs, or coaching services, it’s easy to focus on the excitement of each sale. However, to run a sustainable business, it’s crucial to look beyond immediate revenue and evaluate the true cost of acquiring each customer. This is where understanding your Customer Acquisition Cost (CAC) comes in.
In this post, we'll explore CAC, how to calculate it, why it matters, and how to balance it with profitability—especially when selling digital content via a platform like Sherpo, where your marginal costs are relatively low, but your profitability still hinges on maintaining a healthy ratio between Customer Lifetime Value (CLV) and CAC.
Customer Acquisition Cost (CAC) is the total cost of acquiring a new customer. This includes all the expenses associated with marketing and sales activities aimed at converting prospects into paying customers. For digital creators, it covers everything from advertising, content creation, and promotional offers to the fees paid for using a platform like Sherpo and any additional payment processing fees, such as Stripe's.
Understanding your CAC is essential because it reveals how efficiently your marketing efforts are turning leads into customers. If your CAC is too high compared to the revenue generated by your customers, you might be spending more than you're making—a clear sign that adjustments are needed.
To calculate CAC, sum up all marketing and sales expenses within a given period and divide it by the number of new customers you acquired during that time. Here's a simple formula:
CAC = Total marketing and sales expenses / Number of new customers
For example, if you spent $1,000 on advertising, promotional campaigns, and content creation, and that investment brought in 20 new paying customers, your CAC would be $50.
Example:
While digital creators, unlike traditional e-commerces, often have low marginal costs—thanks to platforms like Sherpo, which charge a low % fee on sales—CAC remains an important metric.
You might think that with such minimal expenses and no inventory costs, your business is highly profitable. However, CAC is a real cost, and if it’s not well-managed, it can erode your profit margins.
To ensure long-term profitability, you must focus on your Customer Lifetime Value (CLV) in relation to CAC. This is where profitability is determined. For every dollar spent to acquire a customer, you want to ensure that their lifetime value—how much they’ll spend on your products or services—exceeds the cost of acquiring them.
A healthy business model often has a CLV to CAC ratio of 3:1 or higher. This means for every dollar you spend acquiring a customer, that customer should generate at least three dollars in revenue over their lifetime.
Here’s how to calculate your CLV:
CLV = Average net revenue per customer × Average customer lifespan
For example, if your average customer spends $200 on your courses over a year, and they typically remain a customer for three years, their lifetime value (CLV) is $600. If your CAC is $100, your CLV to CAC ratio would be 6:1—a strong indicator that your marketing efforts are paying off.
Example:
In this case, with a 6:1 ratio, you have a highly profitable business. You can spend more on marketing!
Even with low marginal costs like Sherpo’s 5% fee, you still need to make sure your marketing investments are profitable. Here’s how to keep your CAC in check and maximize your CLV:
Track all expenses: Ensure you’re accounting for every cost involved in acquiring customers, including advertising, content creation, fees, and discounts. Small costs can add up quickly and impact your profitability.
Optimize your marketing channels: Not all marketing efforts provide the same return. Analyze which channels bring in the most customers for the least cost. Shift your resources to high-performing channels and cut back on those that aren’t delivering.
Increase customer value: To improve your CLV to CAC ratio, focus on increasing the average value of each customer. Offer upsells, cross-sells, or subscription services that encourage repeat purchases. The more revenue you generate from each customer, the better your profitability. Retention is key for a phenomenal business!
If your CAC is higher than you’d like, here are three strategies to bring it down:
Improve SEO and content marketing: Organic traffic is typically more cost-effective than paid ads. Invest in content that drives traffic through SEO-optimized blogs, videos, or tutorials. This not only brings in potential customers but also establishes you as an authority in your niche. With Sherpo Plus and Ultra plans, you can build your own free blog post like the one you are reading right now, leveraging our AI resources.
Leverage referrals and partnerships: Word-of-mouth and partnerships can be low-cost ways to attract new customers. Use Sherpo's affiliate marketing feature to create referral programs that incentivize your current audience to share your content or courses with others.
Target high-value customer segments: Focus your marketing on customer segments likely to generate more revenue over time. This could be customers who buy premium products, or who frequently return to make additional purchases. Tailoring your messaging and offers to these groups can improve your conversion rates and lower your CAC.
Platforms like Sherpo have made it easier than ever for digital creators to sell their content without worrying about exorbitant fees. But, even with low marginal costs, profitability comes down to ensuring that your customer lifetime value far exceeds your CAC. By keeping an eye on this crucial ratio and optimizing your marketing efforts, you can grow your business sustainably, even in a competitive digital landscape.
Always remember: Every dollar spent to acquire a customer should bring in more than just a one-time sale. When managed effectively, your CAC is not just a cost, but an investment in long-term growth.
Giacomo Di Pinto
Aug 25, 2024
4m reading time
Read more articles
With Sherpo,
the sky is the limit!
