Customer Acquisition Cost | How to Calculate it with an Example

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We learn how to understand & correctly calculate the customer acquisition cost (paid & blended), the common mistakes, and why CAC vs. lifetime value is the most important relationship in eCommerce.
► How to calculate CAC for SaaS & B2B companies: • The Ultimate Guide to ...
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In this video, we break down the customer acquisition cost for B2C businesses (no sales team). We discuss the correct formula to calculate CAC, its variations, and why this is such an important metric with startups & venture capitalists (most important comparison: customer acquisition cost vs. lifetime value).
*Note: this video calculates CAC for a B2C e-commerce business with no direct sales team. If you have direct sales reps, you can include their salaries + bonuses in CAC as well in the same way we include advertising spend in this video.
First off, when people throw around the term customer acquisition cost, other synonyms they might use could be "CAC", "CPA" (cost per acquisition), and "marginal cost of acquisition". These terms all mean the same thing, just as a heads-up.
But to complicate the subject further, there are actually a few different variations of the custom acquisition metric that are commonly used. When people refer to CAC, they implicitly are referring to blended CAC.
This is why it is critical to understand how to calculate CAC, as well as understand its other common metrics like Paid CAC (or more specific metrics around individual channels).
Lastly, people very frequently calculate these metrics incorrectly, using orders instead or customers, or forgetting to exclude certain types of expenses.
We cover the correct formula using a step-by-step example so that you'll have a very clear understanding, as well as how to understand why customer acquisition cost vs. lifetime value is so critical.
By the end of this lesson, you will feel very comfortable calculating this metric and understanding its significance for e-commerce businesses and other startups.
If you have questions - please leave a comment below and I'll try to help. Cheers!
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#cac #customeracquisitioncost #ecommerce #startups

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30 сен 2024

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Комментарии : 109

@eric_andrews Год назад

Questions? Let me know in the comments happy to discuss.

@socal0buck Год назад

Most people want to see a fully loaded CAC. That includes all related sales and marketing expenses, including salaries, commissions, and tools, etc.

@eric_andrews Год назад

It depends on what type of business you are looking at, in some cases fully loaded can distort the numbers in an unhelpful way. For example, a new company that has a marketing team of a director of marketing, a media buyer, an SEO expert, and a social media manager, launching a new startup and just spent their first $3000 in ads and got 2 new customers. Loading those expenses all into the CAC - say it spits out a CAC of $14K - might not make sense right away in the sense that it doesn't tell you what CAC to expect as you try to scale. That being said in other situations it does makes sense. Just have to use your best judgment. Hope that is helpful.

@eric_andrews 3 года назад

What's something new that you learned in this CAC video? Or something you liked? Let me know in a comment!

@mwihaki__ 3 года назад

Where are the overhead costs? application cost such as Mailchimp?Client Lunches? Phone bills for cold calls etc? I feel like this method really leaves our most of the costs. I would like to hear your perspective of these hidden costs.

@eric_andrews 3 года назад

@@mwihaki__ Hey Marion, I think you're thinking more about CAC for a B2B business, which includes / excludes different expenses than B2C, I just released a video on it, cheers ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-hsXG8QSzaek.html If you have a direct sales team, then you basically include everything related to them (salaries, bonuses, lunches, etc). That's a big difference between the B2B and B2C sales funnel, most B2B eCommerce companies don't have a sales team.

@jimlemoine8752 3 года назад

Hi Eric, thank you so much for these videos, they're extremely helpful. 2 little excel suggestions that might be helpful - when copying a formula (or any info) over to the right, just stay on the cell, hold Shift like normal to select the cells to the right, and use Ctrl+R to fill right and save a step vs Ctrl+C Ctrl+V. Also when adding a row with Alt HIR you don't need to select the whole row, you can just add a row from any cell in that row. Thanks again, keep up the great work

@eric_andrews 3 года назад

Hey thanks for the tips Jim! Will try to practice those and use in future videos. Cheers!

@kevinl2372 2 года назад

Hey Eric - out of your total marketing budget, a % of those dollars are going towards retention activities. How are you determining overall Acquisition dollars as a %/amount of the overall marketing budget when allocating to CAC determination? Eg. PPC I could spend $5K a month, but, $2500 of that is reaching existing customers; in which case would I want to use the $2500 left to assume my true acquisition spend? In which case that would lower the CAC by half? How do you recommend determining that %? Thanks!

@eric_andrews 2 года назад

Good question. Yeah I mean the typical business is spending only a tiny fraction of their overall spend on retention because those audiences are so much smaller than prospecting audiences. Maybe an 80-20 split is normal (80% prospecting). If you want to get really granular I would take your prospecting spend and divide it by the new customers.

@Dylan-cr5ub 22 дня назад

Thank you Eric, great video ❤!

@vladanlausevic1733 2 года назад

I am just learning about CAC. Thanks for the video.

@wouldyourathergofor Год назад

Thank you Eric for this really helpful explanation. Now I might overlooked this, but could you let me know why New Customers - Organic should be added to Customers section for the CAC formula, when they were acquired organically without the paid ads effect? I'm thinking that they might be returning customers using different accounts, etc.? Hope I make sense. Lol.

@eric_andrews Год назад

Hi, I don't understand your question but if you can try to rephrase it I will try to help

@DigitalMadeSimpleLLC Год назад

I'm not sure I completely understand the very last part of @Ralph Landero 's question either but his initial question is one I'm curious about as well. I'm the marketing manager in a B2C company who has exclusively relied on organic marketing this past year for customer acquisition. Based on your very helpful video, since you only count paid ads and no marketing / pr salaries, would that mean our CAC would always be 0 (as long as we didn't incorporate paid ads)?

@lilypeng3689 3 года назад

Hey Eric, thanks for the awesome content! I'm not sure why the marketing payroll is not counted as a cost? Would you please explain? For me it makes sense to count it, especially if a company does a lot of inbound marketing that requires a lot of work hours internally

@eric_andrews 3 года назад

Good question! So, CAC is somewhat flexible in its definition, although there are ways that are quite objectively wrong to calculate it depending on the actual company, but I could see what you suggest making sense. With a B2B sales team, generally we DO include the sales reps bonuses and payroll in the CAC calculation because that is a scalable and measurable channel. With most high-growth venture-funded startups, the marketing team doesn't directly touch the users, they more manage the ad platforms and things like that. So if the facebook ads rep was making $80K and we acquired 500 customers and spent $20K in ads, it makes more sense to think about the $20K / 500 than the ( $80K + $20 ) / 500 because the ad spend is what is scalable and remember we are focused on scalable growth and the per / conversion efficiency of that lever. If the rep then acquired 1000 customers in the next time period, it wouldn't make sense for CAC to get cut in half just because his / her salary stayed the same, you see what I mean? I would say you decide what it is but remember we are focused on how efficient are our scalable growth channels, and what specific marketing $ touch the clients and are converting them. I generally just would measure paid CAC, and watch your organic conversions as well (maybe calculate your inbound team CAC with that), and do the math on the ROI of each team. Cheers

@poteimiameso4455 Месяц назад

The organic new customers are NOT gained through the paid channels. So why the blended CAC sensible? All paid advertising cost should belong to paid new customer, shouldn't it?

@eric_andrews Месяц назад

@@poteimiameso4455 try turning all your paid off and see what happens to organic. It crashes. It's literally impossible to accurately track your paid performance right now with all of the changes in data tracking. That’s why it's important to track CAC in various ways to try to estimate it.

@duncanmahood2878 3 года назад

Super helpful Eric! Thanks so much man, keep it coming!

@eric_andrews 3 года назад

Appreciate the feedback Duncan, my pleasure and stay tuned, there's lots more to come!

@prachisaxena2202 9 месяцев назад

Hi Eric, Thanks for sharing video. Can you please tell Which formula I should consider then ? Only paid customers? or sum(paid +unpaid customers) Thanks in advance

@eric_andrews 8 месяцев назад

In general I would use all new customers. It is very difficult to differentiate between paid / unpaid now that data tracking has been heavily restricted since 2021. It is possible, and worth trying if you are in marketing, but for anyone else in a company (like a finance person/founder) just plain blended CAC is fine.

@juwonrichard Месяц назад

Can this be done On gohighlevel?

@BrettFoxstartupceo 3 года назад

Nice explainer video, Eric

@eric_andrews 3 года назад

Hey Brett - glad it was helpful for you. Thanks for the feedback 🙏👍

@gokulnaththeboss08 3 года назад

Nice collection of videos hopping to see more of ur content. Plz teach how to use macros and excel combined to make automation too

@eric_andrews 3 года назад

Hey Gokul - really appreciate that, I'm glad you're finding the content valuable. Thanks for the recommendation on content! I'm not the greatest with macros, but I'll see if I can come up with something down the line....🙏😀

@realgouravverma Год назад

In my understanding pr agency is like Google or fb ads. Where we put some money and they promote our stuff and we get customer. So why not including pr agency. Please clarify 🙏

@eric_andrews Год назад

PR agency are consultants. Google or Facebook is direct paid advertising where if you spend $100 you should you ads X times. Very different.

@shivsharma8546 Год назад

how do you think about churned? i.e. implied cac if exclude churned customers

@eric_andrews Год назад

Sure, churned customers have nothing to do with CAC so you ignore them. CAC just has to do with new customers acquired. Customer churn has to do with retention which has its own separate set of metrics

@StockSpotlightPodcast 8 месяцев назад

Getting exact customer details instead of orders is not always easy. You would almost need a survey at the end of their first transaction asking how they found you

@eric_andrews 8 месяцев назад

Usually they have to enter their email at some point to make the order so Shopify and other platforms track automatically

@SoumyaVyas-r9q 8 месяцев назад

Hi can you please share how to calculate increamental CAC

@eric_andrews 8 месяцев назад

Same calculation but just segmented. So if you were spending 10k last month and acquired 500 new customers, if you added a new channel this month and spent 2K on it (so total would be 2k + 10k = 12k), so look at how many extra customers you got from the new incremental 2K in spend. So if you had 600 toral new customers, you might say incremental CAC is 2K / 100 (we got 100 more new customers from the 2K).

@MarcusGreen-f8x 6 месяцев назад

Would you include the amount you spend on ad content production costs?

@eric_andrews 6 месяцев назад

I personally would, yes, if the content is being used primarily for ads

@christiandale5392 3 года назад

Hi Eric, great video! Just one question, my investor told me to include marketing salary into CAC and Ive read this other places too. Why dont you add it? Wouldnt excluding salaries give you CPA?

@eric_andrews 3 года назад

Hey Christian. So the calculation for CAC is definitely flexible, sometimes people include all marketing expenses like salaries, sometimes not. The reason I strip it down usually to just the advertising because I want to understand in a very precise way how efficient and how scalable my marketing expenses are, but some people want to include all expenses in their CAC. I think the fully loaded metric tells you something slightly different as I don't think it really tells you how scalable your marketing is because it implies that with incremental salaries you should be able to acquire incremental users, which doesn't seem right to me, but it does do a good job reflecting your marketing cost center better. Sometimes I calculate various CACs at the same time! Hope that helps.

@christiandale5392 3 года назад

@@eric_andrews Hi Eric. Makes sense, thanks for the explanation!

@eric_andrews 3 года назад

@@christiandale5392 no problem!

@sunilchauhan3558 3 года назад

Please make video zoom I couldn't see properly

@eric_andrews 3 года назад

Hey Sunil - thanks for the feedback, I'll try to make sure to zoom in more in my future content. It's hard to fit entire spreadsheets into these videos! Thanks for letting me know.

@thijmencla 3 года назад

Well explained Eric, thanks! I was wondering how you can determine paid CAC now after ios 14 changes. In my prospecting campaigns I see more and more retention orders as people opt out and Facebook is getting less and less accurate. With Google branded search ads, there will be first time buyers and retention as well. Solely determining the CAC based on last indirect click (GA) isn’t giving a clear vision as well, right? Or is it more a baseline that you need to set up and based on that you could see if its underperforming or on target? Really curious about your opinion. I’m currently more and more relying on blended cac.

@eric_andrews 3 года назад

Hard to answer all in a comment but yeah the iOS thing has been an absolute disaster in terms of tracking and attribution. At a very high level just see if the marketing as a percentage of revenue has changed, sometimes you see a drop off in "performance" but you'll see that advertising as a percentage of revenue has stayed the same so you are actually ok. Im also seeing a lot more people shifting prospecting campaigns to Google, things like shopping and non-branded search campaigns because Facebook has been tremendously choppy. Make sure you're looking at metrics like click-through rate, CPM, and CPCs because that all happens before the conversion so those metrics should be the same regardless of iOS. Hope that gives you a few ideas and yes we're having to rely a lot more on blended metrics because we're a little bit blind right now

@thijmencla 3 года назад

@@eric_andrews thanks for your extensive explanation! I’m currently shifting to blended CAC as my North Star metric. Still seeing the same results as before IOS14 fortunately.

@eric_andrews 3 года назад

@@thijmencla that's great news. Yep blended is probably your way to go then.

@eric_andrews 3 года назад

@@thijmencla Good to hear it. Cheers

@asminchauhan 2 года назад

One question, Where do I get the new customer data from?

@eric_andrews 2 года назад

Your customer purchase data. So you just count the number of people who are buying your product (new or first time buyers)

@thetanuagrawal 2 года назад

Thankyou Eric, your channel is a gem, lots of best wishes from india

@akshayanagarajan6728 Год назад

Do products priced at different levels have different CAC?

@eric_andrews Год назад

CAC is better to measure at the customer level (not order level) and then measure their LTV including all the different products whatever the price.

@akshayanagarajan6728 9 месяцев назад

How do we calculate LTV for a new business@@eric_andrews

@orshamaim 4 месяца назад

You are so good! 🙏🏽 thanks❤

@eric_andrews 4 месяца назад

You got it!

@gabrielfagundes9874 2 года назад

Hey Eric, tks for your videos. I'm starting now as an analyst in a VC in Brazil and your videos are being really helpful

@gustosnacks1796 Год назад

Is this B2B or B2C? Can I use it for both?

@eric_andrews Год назад

I actually have another video focused on B2B with sales teams, if you don't have a sales team then this B2C video works for either

@sarbjit4368 7 месяцев назад

you have any video on ROAS?

@eric_andrews 7 месяцев назад

Yes, lots: ru-vid.com/group/PLdoBuNNnCmdXiKjTn5LIA8UAPu2kgCT5n

@msr4fun 2 года назад

Dear Eric: You videos are very informative. Thanks for great work & helping many. Is it possible have video on how to calculate Subscription cost for SAAS & On-Premise Software?

@eric_andrews Год назад

Yes I have a ton of videos on SAAS! I have the SAAS financial model, and the subscription based e-commerce model as well. I think those will have what you're looking for.

@ra7bany 2 года назад

Hi Eric, Thanks for the information shared. I would like to know if this is applicable to the restaurant business. If yes, please let me know how to do that! Thanks,

@eric_andrews Год назад

Yes, absolutely. You would just need to understand which clients are new, and how much you spent on advertising. That would be a great metric to track for a restaurant, especially because you can potentially have a high customer lifetime value for a restaurant.

@gokaypehlivan5609 Год назад

Hi Eric, thanks for the video! Just wanted to ask why wouldn't we include "returning customers" to the CAC calculations? You mentioned that many companies are not spending money for the second purchases. However, isn't that second purchase also important? And within the more auto-targetting campaign era nowadays, should we assume that our ads are not reaching our existing customers? I guess we're reaching them automatically with our ad efforts.

@eric_andrews Год назад

It's a good question. Usually if you took the entire marketing efforts of a company like 90-95% of them are focused on prospecting. Yes returning customers are extremely important, but usually you are converting them through email & promos. I haven't really seen it done, but if you could tracking, you could theoretically include re-targeting in your CAC if you were looking at the full customer lifetime.... that would be interesting. But big picture more of your marketing dollars go towards getting in front of new people, while converting returns usually happens through free or cheap (small ad budget) channels.

@nicolechen159 3 года назад

I have also seen CAC calculated using Prior Period's S&M expense / New Customers for this Period - is that a different type of CAC calculation?

@eric_andrews 3 года назад

Hey Nicole - yes, that would apply if you have full-time sales reps, in that case, you would include their salaries and bonuses in CAC. This video was focused more on B2B e-commerce (with no sales team), and what you're thinking about is usually more B2B sales, but good point and nice thinking (I'm gonna make another video on that as this is coming up multiple times!). Other marketing expenses (outside of paid advertising spend and sales team compensation) - I would exclude always. So I would exclude marketing team salaries, consultants, branding, design - all the other marketing stuff you exclude in CAC. Similar for any CAC metric.

@dcarlosano6363 2 года назад

Hi Eric, thanks for the great work 🔥. I wanted to Ask if should Also be considered the cost related to creating content for social media such as tiktok/Instagram ? (Shooting content/videomakers etc. for content marketing) Do i put those costs in "Other marketing" ? So in that case should i consider all the traffic from these social media as "Paid new customers" since It has a cost related to creating new content consistently ? ?

@eric_andrews 2 года назад

Hey - it's a good question and there is no 100% right answer on this one. I personally would probably include it if it is for creating ads. In terms of organic social media traffic and purchases no I probably wouldn't include them in your paid cac, and if the content is related to organic social you may want to leave those costs out of paid cac and just leave it in blended. With the new iOS it is getting really hard to break out paid CAC these days though so we're mostly just relying on blended now, just an FYI. Things changed a lot in the last 6 months around tracking.

@225mrraj 3 года назад

What if no new customers are acquired for a particular month? How do we interpret CAC in such cases where new customer acquired = 0?

@eric_andrews 3 года назад

If you spent marketing money and you converted no new customers? Obviously that is bad

@julianschu5643 Год назад

Nice content! We use Marketing to generate leads and then we have sales people taking care of them and develop them into actual customers. Any hints on how to take this part of sales process into account of CAC?

@eric_andrews Год назад

Sure, I have another video on CAC for B2B (with sales team) ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-hsXG8QSzaek.html

@USpropaganda 2 года назад

Hey Eric! Thank you, this is awesome! Totally saved me. Just liked and subscribed, can't wait to check out more of your vids! Oh I did have a question. Why do you multiple the total customers by 1.2 to get the total orders?

@eric_andrews 2 года назад

Hi Timothy, first off thanks! So that 1.2 just highlights that orders and customers are often different numbers. Some people use orders for their CAC, but what we want are the individual customers themselves, who may be making orders of more than 1 unit of product. Hope that helps

@olivergottfried2536 Год назад

Hi Eric, Great video! You're totally right with your last comment, that for us VCs its paramount to understand the development of CAC (mainly focusing on paid CAC) when a startups is scaling. I guess for most founders it would be interesting to learn more about a positive & negative scenario for CAC (CAC exploding or staying low) when a startups is scaling and what measures could keep CAC low.

@eric_andrews Год назад

Hi - thanks for your thoughts on this! Yes it's a very nuanced subject, thanks for mentioning it. Sometimes a CAC being too low is a negative thing (limiting growth only converting lowest hanging fruit, etc), or sometimes there are big re-forecasts happening around LTV (upward or downward) which change the CAC performance (even if the CAC is stable). I will think about incorporating this subject into a future video....thanks for the idea! Also, I'm not sure if you saw but I just released a 3-part "unit economics journey over startup lifecycle" series which might be an interesting resource for your founders or for you when evaluating startups. ➡ Part 1: SaaS ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-o9ufogwDrwc.html ➡ Part 2: Marketplaces ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-Vo3uLzm54-Y.html ➡ Part 3: eComm ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-gG33a-ErNRQ.html

@olivergottfried2536 Год назад

@@eric_andrews True indeed.I just checked the videos out! Very valuable work. Good job :)

@gregorycohen5221 3 года назад

Wow,” this seems so simple now. Thanks for another amazing video, Eric!!

@eric_andrews 3 года назад

Glad this CAC explanation helped you out greg!! Thanks for checking it out 🙏🙏🙏

@gabrielfraser6824 3 года назад

Thank you Eric for the excelent explanation! I have a question, in 5:45 you calculate Blended CAC. Do we only take Paid Adv? Don't we also have to sum "Other Marketing" in the equation? Thank you again! (from Argentina)

@eric_andrews 3 года назад

Hey Gabriel - so CAC has a flexible definition in reality. In general, you want to calculate the metric that will most show you 2 things - how efficient your CAC is, and how scalable it is. When you include marketing salaries (for example) in your CAC, for a lot of businesses that doesn't help you figure out how scalable or efficient your acquisition is, for example, if you add a bunch more salaries, would your users go up? In many cases, the answer is no, but for some businesses, the answer might be yes. Long story short, you can decide based on your business, but just including advertising gives you a very exact view into the cost & scalability of acquisition for many businesses. You can also calculate it multiple ways and track them all - that is valuable as well! Cheers

@gabrielfraser6824 3 года назад

@@eric_andrews thank you so much for answering! Now I have a clear idea. In order to calculate scalability, I need the variables which accompany scalability. Thank you for taking the time to answer my question! You have a new subscriber.

@eric_andrews 3 года назад

@@gabrielfraser6824 You got it. Cheers, thanks gabriel!!

@gwwyl 2 года назад

Great content - thanks 🙏

@MC-hg3vl 11 месяцев назад

Hi Eric, your content has been super helpful. Thank you for all of these! Question - what happens to your acquisition cost in the month if you did not bring in new customer? These costs would have still incurred even when you did not get any new customers. What is the best way to handle?

@eric_andrews 11 месяцев назад

I think in that scenario I would just put a "N/A" for CAC next to your total marketing cost. You could also possibly apply your current marketing expenses to your next month's CAC if you felt that your current spend has a 1-month delay on moving customers down the funnel to the conversion if you wanted to get fancy.

@MC-hg3vl 11 месяцев назад

@@eric_andrews ok great! Yes, I think there is at least 3 months delay before they convert. A 3-mo rolling will probably be the correct time period for our use case. Thanks so much for your quick reply!

@eric_andrews 11 месяцев назад

@@MC-hg3vl For sure using a rolling window is a good strategy as well for businesses with longer sales cycles

@CPAdroit Год назад

Thanks bro, your videos are very useful

@eric_andrews Год назад

Glad to hear it!

@marionharris5952 Год назад

Thank you. Great vid

@eric_andrews Год назад

My pleasure

@tasfia5904 3 года назад

Hi, could you please explain why total orders are multiplied by 1.2?

@eric_andrews 3 года назад

Hey Tashfia - good question. Yes that's just an assumption (I made) that the typical customer orders 1.2 items, on average. So it demonstrates the importance of the difference between "total customers" vs "total orders". Does that make sense?

@jacqueskiyombo7081 2 года назад

@@eric_andrews been looking for this question, thanks eric

@eric_andrews 2 года назад

@@jacqueskiyombo7081 glad to hear it!

@myztartupjourney6772 3 года назад

How do you figure this out without any customers when forecasting? My business is B2B so i cant look at digital marketing statistics to see who clicked an add

@eric_andrews 3 года назад

Hey Kenneth - if you are B2B, do you do 1-1 sales? How does the sales funnel work? Usually with B2B companies, you just need to think about how many total dollars you invest in one customer to convert. I just released a B2B SaaS model that covers the B2B funnel and CAC too if you're interested ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-C7S6lXu4NS4.html This video was for more of a traditional B2C ecommerce business, but I'm happy to brainstorm with you more about CAC for B2B....that's a great video idea too, thanks

@myztartupjourney6772 3 года назад

@@eric_andrews if you are b2b you cannot project you CAC without having initial customers right?

@eric_andrews 3 года назад

@@myztartupjourney6772 You could definitively project CAC! So, the idea of a "forecast" is that it is the future. So whether you have initial customers or not today, in either situation you are making a complete guess (based on reasonable assumptions) about the future. So I ultimately would go through the cost of a set of marketing activities you will do to get new customer (whether salary for a sales person, paid ads, etc) and just make guesses about - for example, how many emails you would be able to collect with paid ads (maybe $50 an email), and then what % of those emails you'd be able to convert into a paying customer (maybe something small like 2%). You see what I mean? Projections are always guesses, just be reasonable with your guesses to try to reflect reality as best as possible. Hope this helps

@eric_andrews 3 года назад

Just released a B2B CAC video for you Kenneth! ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-hsXG8QSzaek.html