Why CAC Cohort Analysis Is Important to the Sales Process

June 19, 2023 by Christine

If you want your business to be successful and sustainable (and let’s face it—we all do), you need a strong sales process. But how do you gauge how efficient your sales process actually is? For starters, you can conduct a CAC cohort analysis. This method of analyzing data can provide valuable insights that you can apply to your efforts moving forward. 

Let’s dive in…

What Is a CAC Cohort Analysis?

Customer acquisition cost (CAC) per cohort analysis is a way of analyzing the cost of acquiring customers based on specific groups, or cohorts, of customers. Using this method, you group customers into cohorts based on factors like when they signed up or made their first purchase.

By analyzing the cost of acquiring customers within each cohort, you can gain insight into the effectiveness of your marketing and sales efforts. Plus, you can determine the overall value of your customers. The best part is you can use this information to optimize your customer acquisition strategy and improve your ROI.

How to Calculate CAC per Cohort 

The first step in performing a CAC cohort analysis is to figure out your CAC per cohort. 

To calculate CAC per cohort, you divide the total cost of acquiring customers within a cohort by the number of customers acquired in that cohort. 

For example… 

If you spent $10,000 to acquire 100 customers in the first quarter of the year, your CAC for that cohort (i.e., first-quarter customers) would be $100: 10,000 / 100 = 100.

By tracking CAC per cohort over time, you can identify trends and patterns that can help you optimize your customer acquisition strategy. You may find that certain marketing channels are more effective at acquiring customers in certain cohorts. Or, you may discover the cost of acquiring customers decreases over time for certain cohorts. 

What Are Acceptable CAC per Cohort Payback Targets?

The next step in your CAC cohort analysis is calculating your CAC per cohort payback.

CAC payback refers to the time it takes to recover the money you spend acquiring a customer—that is, break even. And in this case, we’re looking at the average per cohort rather than the average in general. 

Once you’ve figured out the CAC per cohort, divide it by the monthly recurring revenue (MRR) for that cohort. So, if your CAC per cohort is $100, and the MRR is $20, your CAC per cohort payback would be 5 months. 

The list below shows acceptable CAC per cohort payback targets by business size:

• Small to medium business targets are 6-month CAC per cohort payback with a 2-5% monthly revenue churn.
• Mid-market business targets are 12-month CAC per cohort payback with a 1-2% monthly revenue churn.
• Enterprise business targets are 18-month, or less, CAC per cohort payback with less than a 1% monthly revenue churn.

If the CAC per cohort paybacks fall within this range, then good news—you have an efficient sales engine!

Can a CAC Cohort Analysis Make a Sales Process More Efficient?

Yes, CAC cohort analysis can make a sales process more efficient.

How?

A cohort analysis is a powerful analytical tool that helps businesses understand how a group of customers behaves over time; CAC is a metric that measures the cost of acquiring new customers. By combining these two metrics, businesses can gain insights into how much it costs to acquire customers within specific groups and how these costs change over time.

By analyzing the CAC for each cohort, you can identify which customer segments are the most profitable and which channels are the most effective for acquiring them. You can also identify trends in CAC over time and adjust your sales and marketing strategies accordingly.

For example, you might find that your CAC for customers acquired through social media is increasing over time while your CAC for customers acquired through email marketing is decreasing. By shifting your marketing budget from social media to email marketing, you could potentially reduce your overall CAC and increase the efficiency of your sales process.

In short, CAC per cohort analysis can help businesses optimize their customer acquisition strategies and make their sales process more efficient by identifying the most profitable customer segments and the most effective marketing channels.

How to Evaluate the Growth of a Cohort over Time Using Customer Value Analysis

Along with CAC cohort analysis, customer value analysis (CVA) is a useful tool for understanding the economic value a cohort of customers generates for a business over time. Evaluating the growth of a cohort using CVA typically involves tracking key metrics such as… 

• Customer acquisition
• Customer retention
• Profitability 

…over time. 

Here are some steps you can follow to evaluate the growth of a cohort using CVA:

1. Define the cohort: Start by defining the group of customers you want to analyze. This could be a group of customers who signed up during a particular time period or have similar characteristics such as age, geographic location, or purchasing behavior.
2. Calculate customer lifetime value (LTV): Calculate the LTV for each customer in the cohort. This involves estimating the revenue a customer is likely to generate over their entire relationship with the business, taking into account factors such as purchase frequency, average order value, and customer retention rates.
3. Analyze retention rates: Analyze how many customers in the cohort remain active over time. This can be done by tracking the percentage of customers who make repeat purchases or engage with the business in some other way over time.
4. Calculate cohort profitability: Calculate the profitability of the cohort by subtracting the cost of acquiring and servicing these customers from their total lifetime value.
5. Analyze changes over time: Track these metrics over time to evaluate the growth of the cohort. For example, if the retention rate or LTV of the cohort increases over time, this suggests that the business is doing a good job of retaining valuable customers and/or acquiring new, more profitable customers.

By following these steps, you can gain insights into how a cohort of customers is performing over time. More importantly, identify opportunities to optimize customer acquisition, retention, and profitability.

How to Determine If the Sales Process in Motion Is Optimized for CAC per Cohort Payback

As you evaluate and summarize cohort performance, you should ask yourself these questions:

1. Are the newer cohorts reaching a break-even point sooner than the older cohorts?
2. Are the newer cohorts expanding in quantity and quality over time? 
3. Are cohorts expanding faster in the CVA?

When the answers to these questions are “yes,” especially for early-stage offerings, you are on your way to an efficient, well-tuned sales machine.

Why Is Sales Efficiency Important?

We’ve talked about how performing a CAC cohort analysis can help make your sales process more efficient. But why is that important?

Here are some of the benefits of increasing sales efficiency in your business… 

It Leads to Cost Savings

Sales efficiency can lead to significant cost savings by reducing the time and resources required to close a sale. This means your business can generate more revenue with fewer resources, which can help improve your bottom line.

It Helps Increase Revenue

Sales efficiency can also lead to increased revenue. By reducing the time it takes to close a sale, you can boost the number of sales your business makes in a given period, which can help improve revenue growth.

It Can Provide a Competitive Advantage

Businesses that are more sales efficient than their competitors can gain a competitive advantage in the marketplace. By being able to close deals more quickly and with fewer resources, you can offer your products or services at a lower cost or with higher profit margins, which can help you outcompete others.

It Delivers a Better Customer Experience

A sales process that is efficient can also lead to a better customer experience. Customers are more likely to be satisfied if they are able to quickly and easily purchase the products or services they need. Plus, this can lead to repeat business and positive word-of-mouth referrals.

Takeaway

If you’re looking to improve sales efficiency in your business, don’t underestimate the value of doing a CAC cohort analysis. This method of analyzing customer data can yield great insights for you and your team. And by applying the findings, you can strengthen the sales process for better success. Need help with your sales and marketing? Discover what you can gain from partnering with a full-service marketing agency like Viral Solutions!

Filed Under: Analytics, Business Tips Tagged With: analysis, CAC Cohort, efficiency, sales