Customer Acquisition Cost (CAC)

By /

Customer Acquisition Cost (CAC) is a business’s total expense to acquire a new customer.

This includes all marketing and sales costs—such as advertising expenses, the salaries of marketing and sales teams, and the cost of sales and marketing tools—divided by the number of new customers acquired over a specific period.1

Formula:

customer acquisition cost formula

How to Calculate CAC:

Imagine an e-commerce startup that spends $5,000 on a digital marketing campaign.

At the end of the campaign, they’ve acquired 50 new customers.

They would divide the total campaign cost by the number of new customers to find the CAC.

The startup spent $100 to acquire each new customer through that specific campaign.2

Purpose:

The primary purpose of calculating CAC is to determine the financial efficiency of a company’s customer acquisition strategies.

It provides insights into how much value is derived from marketing and sales efforts.

By understanding CAC, businesses can make informed decisions about scaling their operations, allocating budgets, and refining their marketing strategies.3

Components of CAC:

  1. Marketing Costs: This includes expenses related to advertising, promotions, content creation, public relations, and any other marketing initiatives.
  2. Sales Costs: Salaries, commissions, and other expenses related to the sales team.
  3. Overhead: A portion of the general operational costs can be attributed to customer acquisition efforts.
  4. Software and Tools: Costs of CRM systems, marketing automation tools, analytics platforms, etc., that support the acquisition process.4

Benefits:

  1. Financial Insight: CAC provides a clear picture of the financial implications of customer acquisition efforts.
  2. Resource Allocation: Helps businesses prioritize and allocate resources to the most effective channels and strategies.
  3. Strategic Planning: Assists in setting realistic growth targets and understanding the investments required.
  4. Performance Benchmarking: Allows businesses to compare their CAC with industry standards or competitors, highlighting areas of strength or improvement.

Usage:

CAC is widely used across industries, especially in sectors with high customer acquisition costs, such as SaaS (Software as a Service), e-commerce, and digital services.

It’s a key metric in boardroom discussions, investor presentations, and strategic planning sessions.

Monitoring CAC helps businesses adjust their strategies quickly, ensuring they remain competitive and profitable.

Reducing CAC:

  • Optimize Marketing Channels: Focus on channels that yield the highest ROI.
  • Improve Conversion Rates: A higher conversion rate means acquiring more customers without increasing spend.
  • Customer Retention: Retaining existing customers is often cheaper than acquiring new ones. By increasing customer loyalty, businesses can reduce the pressure to constantly spend more on acquisition.

Related Terms:

References:

1. Wikimedia Foundation. (2023, July 13). Customer acquisition cost. Wikipedia. https://en.wikipedia.org/wiki/Customer_acquisition_cost

2. Orlando, P. (2022). Growth units: Learn to calculate customer acquisition cost, Lifetime Value, and why businesses behave the way they do. s. n. https://www.amazon.com/Growth-Units-Calculate-Acquisition-Businesses-ebook/dp/B08GJVV8RJ/

3. Livne, G., Simpson, A., & Talmor, E. (2011). Do customer acquisition cost, retention and usage matter to firm performance and valuation?. Journal of Business Finance & Accounting, 38(3‐4), 334-363. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-5957.2010.02229.x

4. Customer acquisition cost (CAC): Calculate and reduce it. (n.d.). https://www.paddle.com/resources/customer-acquisition-cost

Scroll to Top