🔊 Boom shaka CAC

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Hey, it’s Kent here again.

You hear a lot about “CAC” in DTC. Cost of acquisition. Most people think:

Get CAC low = Win

They’re not exactly wrong, but how do you get there?

In practice, it goes through things like target CAC, break-even CAC, and, of course, tracking your CAC on a daily basis. Know what? I’ll throw in some MER (media efficiency ratio) in there, too! Yay 🥳 

I’ll show you how to do it all with a just spreadsheet, not a bunch of expensive tools

So pour your favorite beverage and put on your reading glasses.  🥸🍷 

I hope you don’t hate math.

• 🕵️ Determining Your CAC Targets

• 🐶 Tracking Your CAC

• ➕ Building A MER Profit Calculator

• ✂️ Tools To Make Your CAC Tracking Easier 

FIGURE OUT YOUR CAC

Determine Your CAC Targets

Let’s start with a definition. CAC = media spend / number of sales. So if you spend $1000 to make 100 sales, your CAC = $10. 

Like I said, trying to make your cost of acquisition “as low as possible” isn’t a useful goal. 

Instead, you need to understand:

1. What a break even CAC looks like

2. What you can spend to hit a target CAC (ie; a profit margin)

Step 1: Contribution Margin

The first step is to put together your contribution margin (CM), which is the percentage of revenue left after variable costs are deducted from the sale price.

Contribution Margin = (Sale Price - Total Variable Costs) / Sale Price

Your variable costs include:

• Shipping

• Freight

• Packaging

• Warehousing / pick & pack

• Platform / Shopify fees

• Return %

• Average discount %

Which means the final formula looks like: 

Total Variable Costs = COGS + Shipping + Freight + Packaging + Warehousing + Platform Fees + (Sale Price × Return %) + (Sale Price × Average Discount %)

Total up all your costs and subtract them from your sale price. Divide whatever is left by your sale price and you have your contribution margin.

Pro Tip → you should shoot for a 60% CM or better for hero products. They need to be able to bear the cost of acquisition and still turn a profit. 

Technically, whatever is left over is your break-even CAC. So if you sell something for $100 and your COGS et al come out to $40, then your break-even CAC is $60 (60% contribution margin). 

Of course, we’re not considering fixed costs here, like salaries and overhead. So you definitely want to shoot for something above break even. But this is just a starting point.

Step 2: Get A Single CAC to Shoot At

To get a single CAC to shoot at, create a weighted average of your products by CM according to their sales volume (over, say, the last year). 

Weighted CM = (CM₁ × Units₁ + CM₂ × Units₂ + ... + CMₙ × Unitsₙ) / (Units₁ + Units₂ + ... + Unitsₙ)

Where:

• CM₁, CM₂, ..., CMₙ = contribution margin (in %) of each product

• Units₁, Units₂, ..., Unitsₙ = number of units sold of each product

Or, if you want a quicker, but slightly less accurate way to do this, take your AOV and then just use your average COGS, shipping cost, return rate, etc. Boil it down to a fuzzier, average BE. This looks like: 

Contribution Margin ≈ (AOV - Avg Variable Costs) / AOV

ANYWAYS, take 25% off your break-even CAC, and that’ll give you a target to shoot for.

In our example, that’s: 

$60 - ($60*25%) = $45 target CAC

This doesn’t mean “Hey I need to hit $45 CAC every day or with every order”, but it adds clarity and context to your media buying efforts. 

** NOTE - CAC and CPA (cost per acquisition) seem interchangeable, but they aren’t. CPA refers to the attributed sales on a platform like Meta. Whereas CAC is simply all sales / all spend. 

That said, understanding your break even CAC and contribution margin also helps you contextualize your CPA as well. 

THE DAILY RITUAL

Tracking Your CAC

It’s trivial to calculate CAC once a month or quarter, but if you’re getting aggressive about your acquisition spend, then you’ll need to up your tracking game.

This is especially true as you add marketing and sales channels. If you have your budget spread across Meta, TikTok, Google, and influencer + sales from Shopify and Amazon, then it gets harder and harder to work off the back of an envelope.

Here’s an example of the spreadsheet we started using at RV Snappad when we expanded to Amazon:

Every morning, the first thing I do is check the previous day's revenue, ad spend, total sales. Then I’d input them and have the sheet set up to calculate CAC, MER, % of AOV, and moving 7-day averages. 

**Note - For influencer, I take the monthly send and amortize it across the entire month. 

Something else you can do here is add a notes column, where you can include stuff like changes to the website, pricing, new campaigns, etc. Anything that might impact performance. This seems excessive, but it’s extremely useful when you look back weeks or months later.

ZOOMING OUT

Building a MER Calculator

Alright, so you’ve broken down your break even and target CACs. And you’ve developed a process for tracking it across your channels on a daily basis. 

Now we can zoom out a bit using my other favorite metric: MER (marketing efficiency ratio). It measures the revenue generated per dollar of marketing spend by dividing total revenue by total marketing spend — regardless of attribution or platform. So, if your MER = 5, you’re generating $5 in revenue for every $1 spent on marketing — a 5x return.

We’ll start with something I stole from Sean Frank of Ridge Wallets: the MER DOOMSDAY spreadsheet. 

An example:

This will tell you what you can afford to spend at what media efficiency ratio to make money. It’s not as rigorous as a true P&L, nor is it a substitute for cash flow management, but it’s a great gut check. 

You can add more columns for Amazon (including revenue and associated fees) if that is one of your channels. If you’re trying to project performance, enter your average media spend (all channels), and then this will spit out the MER you need to break even (plus what you’ll make or lose depending on your MER performance). 

You can take this to the next step and create a more dynamic MER profit calculator from your daily CAC tracker. 

For each month, calculate your key averages like this:

Next, pull your MER, ad spend, and (if you have multiple sales channels) your % per channel over to this kind of calculator:

Tailor this for your business, of course. 

Again, this isn’t real profit or cash in the bank, so please don’t neglect your bookkeeping. This is just a method for you to tie your media buying to your financial goals in a ways that goes beyond proxy KPIs like “ROAS”. 

TOOLS

Tools To Make Your Tracking Easier 

This is obviously a lot of manual setup and data entry. But the upside is it’s free if you’re willing to do it all yourself. 

More and more tools are popping up that help you automatically tie your revenue, ad spend, and COGS together, though. 

Here are 3 that I’ve used and would recommend:

1. Sellerboard: a BI dashboard that displays your daily, weekly, and monthly sales and associated expenses. You can input your per SKU costs and connect your marketing channels so you can track net profit.
   
   Sellerboard is super easy to use and it’s relatively cheap (starting at about $29/month). You have to set up separate boards for Amazon and Shopify, however.
   

2. Triple Whale: One of the first and more well-known Shopify-native business intelligence platforms. If you’ve been in DTC for long, you’ve probably seen the ubiquitous TW screenshot:  

You can start out with the free reporting dashboard and get much more comprehensive from there, depending on how much you’re willing to spend. Triple Whale can ingest data from multiple sources and even boasts its own pixel and server side tracking. 

3. Iris Finance: This is where you start getting into CFO territory. Iris is a next-level platform that can take data from across your accounting, marketing, and sales tools and spit out things like daily profit, CAC, aMER (new customer media efficiency ratio) and way more, including 13-week cash flow analysis and P&L projections.

I was lucky to be one of the early beta testers of Iris and can say the team there is killer and the platform is only going to get better with time. I moved to Iris from my spreadsheets because it also integrates our wholesale business.

You read all that?

Slow clap.

Spreadsheets often make more people yawn or go cross-eyed, but the truth is you need this kind of financial grounding to survive in DTC these days. 

Great ad creative and cool emails are nice, but if you’re not sure if (or how) the math works, all of it can be in vain.  

Anyways, thanks for hanging in there 😉

Cheers, 

Kent

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