Learn about customer acquisition cost (CAC) and why it matters
Constantly acquiring new customers is a crucial part of any business, but it’s important to make sure that customer growth isn’t coming at the cost of the bottom line. Being able to calculate the cost of acquiring a customer is an important step toward managing marketing expenses and making your business profitable.
Customer acquisition cost (CAC) is a helpful metric to determine the overall ROI of your marketing programs, encompassing everything from ad spend to staff costs. It may seem difficult to determine if you aren’t familiar with it — but thankfully, calculating CAC doesn’t have to be a complicated process.
There are standard industry formulas that can be applied as long as teams are keeping track of internal expenses. And calculating overall CAC can actually help isolate the most productive efforts while marketers hone in on which campaigns might not be working in the long run.
In this blog post, we take a closer look at customer acquisition cost, how you can calculate your own, and the ways it can provide value to you and your team.
Specifically, you’ll learn:
- What customer acquisition cost is
- How to calculate CAC
- What goes into CAC
- Customer acquisition cost examples
- How customer lifetime value (LTV) and CAC work in tandem
- How to improve customer acquisition cost
- Benchmarks for CAC
- Customer acquisition cost FAQ
- How to get started with CAC
What customer acquisition cost (CAC) is
Customer acquisition cost is how much a business spends on average in order to acquire a new customer. This metric tells marketers how much they are spending across their various campaigns to sell products and services. Understanding CAC is important since marketers want to make sure they’re not spending more than the cost of the goods or services they’re selling in the first place. What’s more, evaluating CAC can help marketers increase the profit margins for their company.
CAC can also show you which marketing efforts are effective and which have a higher return on investment (ROI). CAC can be calculated overall across all marketing efforts or for specific campaigns, making it vital in determining true successes financially.
Keep in mind that traditional marketing efforts imply that marketers are paying for exposure to as many people as possible. While these campaigns don’t typically offer an exceptional ROI, they can lead to growth for a company. But when applying specific campaigns or digital marketing efforts, marketers can use CAC to ensure they’re not paying too much to acquire a single customer. The higher the CAC in relation to the cost of goods and services, the lower the ROI, which is an indicator that targeting is not effective for that campaign.
How to calculate customer acquisition cost
Don’t be daunted by the idea of having to calculate CAC. Customer acquisition cost is calculated by using the simple formula of total sales and marketing spend divided by the number of new customers over a specific time frame. It looks like this:
Let’s apply this formula to show you how simple it is to use. If you spend a total of $1,000 on sales and marketing and get 100 new customers in a specific time frame or from a specific campaign, then your CAC is $10. You simply divide $1,000 by 100, equaling $10.
What goes into customer acquisition cost
For CAC to be accurate and informative, the cost of sales and marketing should include every consideration and expense that goes into the promotion of the products or services. That’s often much more than whatever is spent on a particular campaign.
When exploring the areas that can impact CAC calculations, keep in mind that these costs can be looked at overall or by marketing channel to see CAC per campaign. This can be extremely effective at demonstrating what is working and could benefit from having more money behind it compared to what isn’t working and should be scaled back.
Let’s look at the factors that actually affect how CAC is calculated.
1. Time and industry
What goes into CAC differs from company to company, and marketers should understand their CAC within the context of their own costs of doing business. There is no standard CAC that is optimal for every organization. For example, businesses that are just starting out will naturally have a higher CAC than a well-established brand. Some industries also have higher CACs due to the competitive nature of the markets they operate in.
2. Ad spend
This is the largest component of marketing cost and includes all of the money that you spend on your advertising. Ad spend is often the most direct cost when trying to reach new customers, but don’t mistake it as being the sole measure of your expenses.
3. Staff cost
Marketers also have to factor in the cost of doing business itself, and that includes employees. Consider the salaries for the teams involved and the percentage of their time that may be dedicated to certain marketing or sales efforts. Of course, paying for top employees can also be worthwhile and have intangible benefits.
4. Content cost
Creating and publishing content can add its own costs, whether you produce those materials internally or work with freelancers to outsource them. Keep track of these expenses as well as any associated with getting key influencers to share content with their followers.
5. Technical costs and upkeep
Marketers use a variety of tools to keep their campaigns running smoothly, and most come with a price tag. Make sure to count software purchases and the cost of maintaining those systems when you are looking at campaign CAC.
In addition, costs can be split up by marketing channel to see the cost of acquisition per channel. If you’re not spending much on organic search and it's bringing in customers, that will be more profitable than online advertising (which may be bringing in fewer customers for higher costs). This is very effective at showing you what isn’t working and what should have more money behind it.
How customer lifetime value (LTV) and CAC work in tandem
Context is key when determining not only the business value of your CAC but also the business value of your customer as a whole. That’s where customer lifetime value comes into play.
Customer lifetime value (LTV) is how much an individual customer or account is worth over the course of their relationship with your company. In other words, it’s the amount of money a company makes from a single customer during their entire time making purchases from you.
Customer lifetime value is another calculation that’s relatively simple to determine — it’s customer value multiplied by the average customer lifespan. Customer value is the average purchase value of a customer multiplied by the average purchase frequency, and average customer lifespan is the average number of years a customer continues purchasing from a company.
Let’s look at this with some example figures. Say a software company sells packages at $50 per license that must be renewed each year. The average customer renews six times over a six-year timespan. The math looks like this: (50 x 6) x 6 = $1,800.
Average customer lifetime value matters because it tells marketers how much they will get from a customer in total revenue. And this is deeply important in the context of customer acquisition cost. LTV should be higher than CAC, or the company will lose money.
What may have seemed like a high CAC can look much more reasonable — or not — when put in context with LTV. Using the LTV-to-CAC ratio, marketers can spend money responsibly while knowing that they can recoup the investment over the lifetime of the customer.
How to improve customer acquisition cost
Of course, marketers will still want to maximize their CAC to keep these costs as low as possible and improve the margin compared with LTV. To do this, you can leverage several strategies.
1. Add value
Make sure that your marketing campaigns and messaging demonstrate clear value to your target audience. This can speed up their decision-making process, bringing in customers faster and extending their average lifespan.
2. Increase engagement with customers
Consider using a customer management platform to help curate and manage leads and customers with more personalized communication. By making the customer experience a priority, you can extend their LTV and put your brand’s best foot forward.
3. Optimize your sales process
Take another look at expenses and be willing to trim anything that’s unnecessary to the process. This can be a great way to lower CAC by decreasing internal costs.
4. Use customer referrals
Look for low-cost or no-cost ways of acquiring customers to drive down your expenses. Requesting customer referrals is a great way to do this since they have a CAC of practically zero. Even a handful of referrals each month can make a difference when you average them out.
Benchmarks for CAC
While there is not one universal figure for a great CAC, there are some benchmarks that marketers can use to determine whether their campaigns are on track. As a general rule, customer LTV should be at least three times that of CAC.
A good benchmark for your CAC will depend on multiple variables such as industry, customer lifetime, and age of the company. A new company will naturally have a higher CAC than an established one, and some fields, such as software, tend to have higher average costs than others, like retail.
Generally, CAC should be recouped within the first year of a customer acquisition. And ultimately, a great customer acquisition cost is one that grows with a business at a rate that does not burn through more money than comes in.
Customer acquisition cost FAQ
1. What is customer acquisition cost (CAC)?
CAC is a metric that tells marketers how much they must spend to acquire a new customer.
2. How is customer acquisition cost calculated?
CAC is calculated using this formula — the cost of sales and marketing divided by the number of new customers acquired.
3. Why is customer acquisition cost important?
CAC shows marketers how much is being spent per customer and whether it is effective given the cost of the products or services being sold. Calculating customer acquisition cost can also demonstrate which channels are performing the best in a series of campaigns.
Get started with customer acquisition cost
CAC is a vital metric for any marketer looking to optimize their campaigns and ensure their business remains profitable. Keeping this calculation in the context of customer lifetime value can also help demonstrate where and how it might make sense to bolster or cut back campaigns in line with resources and performance. Broadly, CAC provides you with context on how effective your marketing is at customer acquisition.
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