Original subtitles

It is important to remember that sometimes some customers take

a long time to convert from leads to paying customers.

Maybe they sign up or register for a free account for some months,

and then they are prompted to become a paying customer.

In other words, your marketing campaign may take some time to

realize the revenues it is trying to generate.

To come for that dealing in a lead conversion,

CAC is often calculated on the basis of your average sales cycle.

Let's look at the following example.

Here, we have a slightly different formula based on a 60-day average sales cycle.

We use the marketing cost for August,

and then use a ratio of the sales and marketing salaries,

and overhead costs, for the previous two months.

Don't get bogged down by the formula just yet.

Let's make sure we cover the concept first.

So think of it as you're still paying for those costs,

the salaries, and the overhead cost,

as you wait for the marketing cost, the 9,500,

to realize the lead conversion which is the average cycle of two months in this example.

So here's a formula. We take the marketing costs for August,

and we take half of the overhead cost with sales and marketing from August.

So we add this amount,

the marketing cost for August and add it to half.

So we multiply that with 0.5 of the overhead costs for August.

So that's the sales and marketing salaries,

plus the overhead cost.

We add it to half of the overhead cost for September,

because we're only taking into account the marketing cost for August and

then averaging across the August and September overhead costs.

I think it's done. So this is the numerator.

The numerator is this,

plus half of this,

and half of this.That's the numerator,

and what you're then doing is you're actually dividing it by

the number of paid customers that you got in September.

Because you're trying to gauge

what was the cost of acquiring these paid customers in September.

If your sales cycle is two months,

then you want to take the overhead costs for two months,

so August and September, and average them,

and that's what the 0.5 is doing,

and then you include the marketing cost.

This amount you spent on marketing to these paid customers back in August,

and you divide it by the number of paid customers that you got in September.

I've also included the formula here for you to see.

So that's how you arrive at the CAC for the two month average cycle,

and I copy the formula over to October as well.

[inaudible].

So it's less confusing.

So yes, you can see that the CAC is different

and lower than it was for the one-month cycle.

It was 148 and 138 before,

but now it's lower.

There's a reason for this.

Previously, you were overestimating it.

You were hoping that the leads will convert to customers in a month.

When in fact, it takes them two months.

Businesses can decide their marketing campaign spending based on CAC.

So for that reason, it is important to get more accurate estimate of CAC.