ROAS vs. CAC. A Comparison and Use Cases for Both

In my long-time experience of managing media campaigns, I've often found that two metrics serve as very critical for most decision-making: Return on Advertising Spend (ROAS) and Customer Acquisition Cost (CAC). Both are pivotal, yet they offer distinct perspectives on the health and effectiveness of your advertising initiatives. If these terms have ever left you scratching your head, you're not alone. Let's demystify these metrics, compare them, and explore how they can guide you in making savvy media buying decisions.

What is ROAS?

Definition

ROAS, or Return on Advertising Spend, is your go-to metric for gauging the immediate efficacy of a digital advertising campaign. It's calculated as follows:

ROAS=Revenue?from?Ad?Campaign/Cost?of?Ad?Campaign

When and How It’s Used

Based on client work, I can tell you that ROAS is your quick snapshot. It tells you how much bang you're getting for your advertising buck right now. A high ROAS is a green light, signaling that your campaign is performing well, while a low ROAS suggests you might need to rethink your strategy.

Example Use Case: Flash Sale for a Retail Brand

Imagine you've just run a flash sale and invested $10,000 in a Facebook ad campaign that raked in $50,000. Your ROAS would be a solid 5, meaning each dollar spent earned you $5 back.

Media Buying Decision Based on ROAS

If you're seeing a high ROAS, like in the example above, you might opt to funnel more budget into Facebook ads or even extend the sale. Conversely, a low ROAS is a red flag, prompting you to perhaps tweak your ad creative or targeting.

What is CAC?

Definition

Customer Acquisition Cost (CAC) is the sum total of what it costs you to convince a potential customer to make a purchase. This includes everything from advertising to promotional efforts.

CAC=Total?Cost?of?Sales?and?Marketing/Number?of?Customers?Acquired

When and How It’s Used

CAC is your long-game metric. It's particularly useful for businesses where Customer Lifetime Value (CLV) is a significant factor. In my experience, the goal is to maintain a CAC that's substantially lower than your CLV.

Example Use Case: Subscription Service for a Fitness App

Let's say you've spent $20,000 on marketing and pulled in 200 new subscribers. Your CAC would be $100 per subscriber.

Media Buying Decision Based on CAC

If your CLV is significantly higher than your CAC, you're on the right track. But if the CAC starts inching closer to the CLV, it's time for a strategy overhaul. You might need to diversify your channels or optimize your existing ones.

ROAS vs. CAC: Making Media Buying Decisions

• Immediate ROI vs. Long-Term Sustainability: ROAS is your quick win, while CAC is your marathon.
• Example: For an e-commerce business during the holiday season, use ROAS to test campaigns and allocate budget, but keep an eye on CAC for long-term sustainability.

How Companies Determine ROAS and CAC Goals

Factors Influencing ROAS Goals

• Industry Benchmarks: What's considered a good ROAS varies by industry.
• Profit Margins: Your acceptable ROAS is inversely proportional to your profit margins.
• Business Objectives: Your current focus—be it aggressive customer acquisition or profitability—will influence your ROAS goals.

Factors Influencing CAC Goals

• Customer Lifetime Value (LTV): Aim for an LTV to CAC ratio of at least 3:1.
• Sales Cycle Length: A longer sales cycle might justify a higher CAC.
• Funding and Cash Flow: Your financial standing will dictate how aggressive or conservative your CAC goals should be.

Conclusion

Both ROAS and CAC are invaluable tools in the media buyer's toolkit. ROAS offers a snapshot of your immediate financial returns, while CAC provides a more panoramic view of your customer acquisition costs over time. By understanding and strategically leveraging both, you're not just chasing quick wins but building a sustainable business model. So, the next time you find yourself at a media buying crossroads, remember: it's not just about the here and now, but also about setting the stage for long-term success.

Any questions let me know.