In plain words
Allowable CAC is the highest acquisition cost at which a customer still pays back within the time you can wait. It is the customer's cumulative margin by that month: spend more than that to win them, and they have not paid you back by then.
It gives the people buying ads a number that comes from the offer. A longer wait allows a higher cost, because more renewals count. So the first decision is the wait: how many months of acquisition spend you can carry.
Formula
- Allowable CAC by month m = a customer's expected cumulative margin through month m
Worked example
To be paid back on the first order alone, a coffee subscriber may cost no more than $3.79: the first order's whole margin. To be paid back by month three, the engine's ceiling is $24.06.
Wait six months and it is $37.10. Wait twelve and it is $53.28. The offer is the same in each case, and only the wait has changed.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| Cost of goods | per unit | −$12.00 |
| Pick and pack | per order | −$1.18 |
| Packaging | per parcel | −$0.50 |
| Shipping label | per parcel | −$7.50 |
| Card fee per order | per order | −$0.30 |
| Refunds | percent | −$2.00 |
| Card processing | percent | −$1.16 |
| Contribution margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
Allowable CAC is not a target
It is the cost at which you break even by the chosen month, with nothing left over. Buying customers right at the ceiling earns nothing within that horizon. Aim well below it, and treat the ceiling as the point where a campaign gets switched off.
Using it
Set the payback month from your cash position first, then read off the ceiling. Give it to whoever runs acquisition per offer: an offer with a richer first order can afford a higher cost. Recompute it when the offer, the costs or the renewal rates change, because the ceiling moves with all three.
In Offer Suite
Offer Suite's simulator solves for the highest acquisition cost at which the average customer of an offer pays back by a given month, and says so when even a cost of zero would not.
Source: Offer Suite's offer simulator.