CAC vs ROAS

Handling and choosing the right metrics in digital marketing is what will bring growth and profitability. Two of the most discussed metrics are Customer Acquisition Cost (CAC) and Return On Ad Spend (ROAS). Each of these metrics provides a different perspective of how marketing campaigns are faring; however, it varies widely in terms of what exactly it measures and thus supports a more impactful business strategy.

Let's get into it in great detail about both CAC and ROAS and help you conclude which one better applies to your business.

Customer Acquisition Cost (CAC)

The customer acquisition cost is a measure that informs how much a business will spend to acquire a new customer. Through CAC, you can tell how efficient your marketing efforts are as it determines the average cost you need to make a prospect turn into a paying customer.

CAC = Total Spend / Number of Acquired Customers

As an example, a company that spent $10,000 in marketing investment and acquired 100 customers would have a CAC of $100. The metric captures the cost of acquisition over new customers, which can be crucial for companies with tight budgets allocated to marketing or which have long customer lifecycles in their industries.

But what it doesn't do is give you the full picture; CAC only tells you part of the story. It makes you focus only on the cost to acquire a customer with no reflection of the value that customer brings over time. For businesses with recurring revenue models, subscription-based services, for example, CAC should be paired in conjunction with LTV to paint a full profitability picture.

What is Return On Ad Spend (ROAS)?

The Return On Ad Spend is a key metric, and the goal is how effectively the business turns advertising dollars into revenue. In other words, ROAS is computed using the formula as follows:

ROAS = Total Revenue / Total Ad Spend

For example, you would spend $1,000 on ads, earn $4,000 from those ads, and your ROAS would be 4.0 or 400%. This reflects four dollars in revenue for every dollar that went into advertising.

ROAS measures short-term profitability by focusing on the immediate returns from any marketing campaign. It is a very useful metric in ascertaining whether your advertising efforts are profitable in the near term. This makes it an applied metric for most ecommerce businesses or companies running massive ad campaigns.

CAC vs. ROAS: Key Differences

Even though CAC and ROAS are two of the most important marketing metrics, they draw different insights into your business's performance.

Focus:

CAC concentrates on the cost of acquiring a new customer, incorporating all marketing and sales costs. ROAS focuses on the return on advertisement spend and determines how successfully your marketing dollars convert into sales

Time Horizon:

The relevance of this CAC measure is greater for long-term planning purposes, especially while considering customer lifetime value along with recurring purchases.

ROAS is a direct metric, so it is more short-term in nature. It's capable of enabling businesses to know how effective their individual ad campaigns are.

Comprehensive-ness:

Talking about comprehensiveness, CAC includes marketing expenses where a customer is attracted and adds the contribution from salaries and overhead.

On the other hand, ROAS only looks at revenue directly so that because of the advertising spend but does not account for the operational cost.

When to Focus on CAC?

In businesses that follow a subscription model-for example, with recurring purchases or a long customer lifecycle-CAC is often the more useful metric to measure. This is because such businesses rely greatly on long-term relationships with customers and ensure that they will be able to acquire customers at a cost that enables return over time.

A SaaS company that charges customers $100 per month is alright spending extra up front to acquire a customer, as long as the Lifetime Value (LTV) of that customer more than far surpasses the cost to acquire.

To gain an even clearer view, many businesses accompany this with the use of the LTV/CAC ratio. That compares the lifetime value of a customer to the cost of acquiring that customer as follows:

LTV/CAC = Lifetime Value / Customer Acquisition Cost

A ratio that is more than 1 means that it is generating more revenues from a customer over their lifetime than what is spent on acquiring the customer. More importantly, with such a ratio, the better the sustainable growth.

When to Focus on ROAS?

A company that needs to make sales fast in order to generate cash will probably be at ease working with ROAS. For relatively thin-budget or short-cycle-to-sale organizations, ROAS provides a window of understanding regarding how effective their ad spends are at generating revenue in real time.

For example, an ecommerce store running a flash sale campaign will be keen on their ROAS and how effectively every dollar can be stretched into buying ad units that can be converted into revenue fast. That is because the ROAS helps businesses spend money only in the channels that are lucrative enough to maximize ad campaigns.

Which Metric is More Important for Your Business?
This largely depends on your business model, your desired goals, and the requirements of your cash flow.

Prioritize CAC if:

You have a subscription-based or recurring revenue model.

Your customers are more likely to buy recurrently.

Your focus is long-term growth.

Prioritize ROAS if:

You have a short sales cycle and require fast cash flow.

You operate a high-volume, one-time sales business.

You are focusing on getting maximum ROI on ad spend.

Most businesses need to balance both CAC and ROAS. Although keeping an eye on customer acquisition costs is important for long-term growth, checking your ROAS helps you ensure that your marketing campaigns are making enough revenue to keep your business profitable in the short term.

Combining CAC and ROAS for Maximum Impact

It means that for scaling businesses neither of these is an either/or scenario. The best performers are actually able to find some balance with the findings of both CAC and ROAS.

Thus, for example, by using ROAS, a firm could begin measuring in order to determine whether or not its marketing efforts are profitable. After establishing a solid customer base and reaching momentum, it would then focus on applying CAC to ensure the cost of acquiring customers was sustainable.

This will also be an opportunity to include metrics that can help you trace the effect of your marketing efforts on both short-term sales and long-term growth.

Conclusion

CAC and ROAS metrics are effective metrics for any business involved in digital marketing investments. While ROAS provides insight into short-term profitability within your ad campaigns, CAC is related to the cost of acquiring a customer with a more comprehensive view, focusing more on sustainable and long-term growth.

Those two metrics must be tracked appropriately so that they can be well balanced. In such cases, the result of marketing activities will be reflected in terms of revenue generation and ongoing success for your business.

Source:- CAC vs. ROAS - Which one should you track?