Customer Acquisition Cost (CAC)
Date created: Mar 28, 2018 • Last updated: Mar 26, 2021
What is Customer Acquisition Cost?
Customer Acquisition Cost (CAC) is the cost a business incurs to acquire a new customer. This includes the fully loaded costs associated with sales and marketing to attract a potential customer and to convince them to purchase, divided across all new customers.Alternate names: Cost Per Acquisition
How to calculate
Say a company has the following breakdown of their sales and marketing expenses in one month: Sales and Marketing Salaries- $15,000 Travel Expenses- $500 Commission paid- $3000 Tech Stack-$500 Ads- $1000 In total, their sales and marketing efforts for the month are $20,000. Now, say for that month those efforts enabled the company to acquire 5 new customers. Dividing that total by 5 shows that the company spent $4,000 per new customer. Their CAC is then $4,000 for that period.
Customer Acquisition Cost
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More about this metric
CAC is a fundamental metric and is important to measure not only in aggregate, but also for each market segment or territory you sell into. Knowing CAC, and calculating it alongside other income metrics, allows you to assess which segments are most efficient and profitable.
Customer Acquisition Cost (CAC) is the total cost of acquiring new customers, which is calculated by adding up sales and marketing costs and dividing them by the number of new customers for a specific period.
This metric represents one of the most important KPIs for investors. It is used to understand the scalability of a business and evaluate the company’s profitability. It is also important to look at CAC in the context of the lifetime value of a customer (LTV). These metrics together are key indicators of return on investment.
Typically businesses want to reduce CAC. CAC can be reduced by improving conversion rates and increasing the number of customers acquired. However, if you are in a growth phase, you may be increasing CAC for a period of time.
To improve your CAC, make sure to analyze your top performing acquisition channels and focus on those, while minimizing or eliminating under-performing channels. Assess your sales process—are there steps that can be combined or streamlined to create an easier buying experience for your customers? Focus your efforts on qualified buyers to more efficiently use your resources.
Your CAC will also vary across your different customer segments. Make sure to calculate this metric for each segment. Your enterprise customers will likely take more money and resources to acquire than, say, your smaller customers. It’s important to know the difference so you can assess and analyze appropriately. This will also help you understand which customer segments and products are most profitable.
When applied to Customer Lifetime Value (LTV), businesses ideally want LTV to CAC ratio (LTV:CAC) to be over 3 and CAC payback in under 12 months. Typically, when factoring into LTV:CAC, a ratio of 3:1 is preferable. This would mean each customer, across its lifetime, is valued at three times as much as it costs to acquire them. If your ratio is not favorable, you can return to analyze your CAC to determine how to improve your profitability.