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It is important to remember that sometimes some customers take
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a long time to convert from leads to paying customers.
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Maybe they sign up or register for a free account for some months,
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and then they are prompted to become a paying customer.
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In other words, your marketing campaign may take some time to
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realize the revenues it is trying to generate.
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To come for that dealing in a lead conversion,
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CAC is often calculated on the basis of your average sales cycle.
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Let's look at the following example.
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Here, we have a slightly different formula based on a 60-day average sales cycle.
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We use the marketing cost for August,
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and then use a ratio of the sales and marketing salaries,
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and overhead costs, for the previous two months.
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Don't get bogged down by the formula just yet.
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Let's make sure we cover the concept first.
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So think of it as you're still paying for those costs,
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the salaries, and the overhead cost,
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as you wait for the marketing cost, the 9,500,
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to realize the lead conversion which is the average cycle of two months in this example.
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So here's a formula. We take the marketing costs for August,
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and we take half of the overhead cost with sales and marketing from August.
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So we add this amount,
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the marketing cost for August and add it to half.
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So we multiply that with 0.5 of the overhead costs for August.
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So that's the sales and marketing salaries,
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plus the overhead cost.
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We add it to half of the overhead cost for September,
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because we're only taking into account the marketing cost for August and
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then averaging across the August and September overhead costs.
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I think it's done. So this is the numerator.
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The numerator is this,
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plus half of this,
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and half of this.That's the numerator,
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and what you're then doing is you're actually dividing it by
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the number of paid customers that you got in September.
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Because you're trying to gauge
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what was the cost of acquiring these paid customers in September.
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If your sales cycle is two months,
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then you want to take the overhead costs for two months,
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so August and September, and average them,
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and that's what the 0.5 is doing,
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and then you include the marketing cost.
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This amount you spent on marketing to these paid customers back in August,
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and you divide it by the number of paid customers that you got in September.
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I've also included the formula here for you to see.
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So that's how you arrive at the CAC for the two month average cycle,
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and I copy the formula over to October as well.
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[inaudible].
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So it's less confusing.
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So yes, you can see that the CAC is different
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and lower than it was for the one-month cycle.
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It was 148 and 138 before,
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but now it's lower.
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There's a reason for this.
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Previously, you were overestimating it.
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You were hoping that the leads will convert to customers in a month.
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When in fact, it takes them two months.
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Businesses can decide their marketing campaign spending based on CAC.
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So for that reason, it is important to get more accurate estimate of CAC.
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