Customer acquisition cost (CAC):
Customer acquisition cost is the total cost of acquiring a new customer. The CAC is computed by adding all the costs of acquiring customers divided by the number of customers acquired. These costs include those of marketing, advertising, sales employees, and other expenses i.e. the costs incurred in converting prospects into customers. It is a crucial business metric to measure the value generated by a new customer. It reflects the success of your marketing and sales campaign performance.
Example:
Let's say, you own a newly launched e-commerce company named Buykart.
The following are your expenses in acquiring customers:
Social media campaign = Rs. 1,00,000
Pay-per-click advertising = Rs. 50,000
Magazine Ads = Rs. 20,000
Marketing staff = Rs. 1,30,000
Total expenses = Rs. 3,00,000
New customer acquired = 2000
Customer Acquisition cost (CAC) = 3,00,000/2000 = Rs.150
Customer Life time value (LTV):
The amount of revenue a company can anticipate generating from a typical customer during the course of the customer's relationship with the business. It is an important metric which contributes to the long-term revenue of the company. It can be used to make better-informed marketing and sales decisions.
LTV is calculated as
Customer Lifetime Value = Average Order Value * Average No. of Purchases Per Year * Retention Rate.
Example:
Let's say for your company Buykart,
Average Order Value (AOV) = Rs.3000
An average customer purchases 5 times a year for a lifespan of 2 years
LTV = 3000*5*2 = Rs. 30,000
CapEx - Capital Expenditures:
Capital expenditures (CapEx) are the money spent by the company to make major purchases, which are used over the long term and benefit the company. These expenses are used to improve the performance of the company in the future.
When a business invests in new assets or enhances existing ones in order to increase their value and extend their lives over the current fiscal year, this is referred to as capital expenditure. These are 'one-time' purchases and are reported on the Balance Sheet. It is also known as "Capital Expenses"
Examples: Buildings, Equipment, Machinery, Intellectual property rights, Land, Vehicles
OpEx - Operational expenditures:
Operational expenditures are the day-to-day expenses incurred by a company to keep its business operational. These are the ordinary and customary costs for the company’s industry. All funds spent when converting inventory into throughput fall under OpEx. These are 'pay-as-you-go' purchases and are reported on Income Sheet. It is also known as "Operating Expenses"
Examples: Wages, Rental payments, Maintenance and repairs, Marketing expenses, Travel expenses, Utilities (Electricity, water, gas,.etc)
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