Whether you’re preparing sales presentations, arranging targeted marketing efforts, or simply spreading awareness of your product or brand, acquiring customers always costs money. Here, we teach you how to calculate customer acquisition cost (CAC) so that you can identify how much you’re spending per customer. We also give you tips on how to reduce your CAC and optimize your sales and marketing budget to increase your profit margin.
What Is Customer Acquisition Cost?
Customer acquisition costs (CAC) measure the actual costs of acquiring new customers for your business. It’s one of the most important metrics when measuring profitability, and it provides a clear benchmark that can be compared against historical data, current industry trends, and even against your competitors.
In some cases, however, the CAC might not be readily apparent. Not only do you need to consider your total marketing and advertising campaign costs, but you also need to know exactly how many customers you’ve successfully acquired during those campaigns. Finally, you need to consider other day-to-day costs, too—employee wages, software fees, and overhead costs. Only then will you be able to calculate an accurate CAC.
How to Calculate Customer Acquisition Cost + Examples
Although you can always compare your own CAC to that of other businesses, there isn’t really a standard CAC that can be applied by default. That’s why it’s so important that you take the time to calculate the actual CAC for your own company.
There are multiple ways to go about calculating your CAC. If you’re just interested in learning how to calculate customer acquisition costs as quickly as possible, the basic client acquisition cost formula should suffice. With this formula, you simply divide your marketing campaign costs (MCC) by the total number of customers acquired (CA). The result is your estimated CAC.
|
||||||
Because it is such a basic customer acquisition cost formula, however, this strategy only produces a ballpark figure. To calculate your CAC with greater accuracy, you’ll need to introduce some more variables, including the following:
- W: Wages paid to marketing and sales personnel
- S: Marketing software costs and fees
- E: External service costs
- O: Overhead costs
Using these variables in tandem with the ones used in our basic calculation results in the following cost per customer acquisition formula:
|
||||||
While the basic formula is only concerned with marketing campaign costs and the total number of customers acquired during that campaign, the second, more advanced customer acquisition cost formula considers all pertinent costs. As such, it produces a CAC that is far more accurate than the former.
Basic CAC Calculation Example
Let’s consider the case of a fictitious wedding gown and tuxedo designer known as Here Comes the Bride and Groom. Within a year, they managed to acquire 1,500 new customers. Since they’re a startup company among their community, their marketing efforts are kept to a minimum. The annual CAC expense sheet for Here Comes the Bride and Groom might resemble something like this:
Item | Cost Per | Total Quantity | Total Amount Spent |
|---|---|---|---|
Wages paid to marketing and sales personnel | $40,000 | 2 | $80,000 |
Social media advertising campaigns | $2,000 | 5 | $10,000 |
Pay-per-click advertising | $1.00 | 25,000 | $25,000 |
Total Marketing Campaign Costs | $115,000 | ||
When applying the basic CAC calculation to the above example, the CAC for Here Comes the Bride and Groom is $76.66.
|
||||||
|
||||||
|
||||||
|
||||||
You can use our CAC calculator below to determine your customer acquisition cost.
Advanced CAC Calculation Example
The basic CAC calculation only provides a rough estimate. If you want to learn how to calculate customer acquisition costs with greater accuracy, you’ll need to use the advanced CAC calculation method. For simplicity, we’ll stick with the same fictitious company above, Here Comes the Bride and Groom, with 1,500 new customers.
Instead of an itemized breakdown for marketing costs, these costs are simply grouped into “marketing campaign costs.” Wages paid for individual marketing and sales personnel, however, are kept separate.
Item | Cost Per | Total Quantity | Total Amount Spent |
|---|---|---|---|
Marketing campaign costs | $2,000 / $1.00 | 5 / 25,000 | $10,000 / $25,000 |
Wages paid to marketing and sales personnel | $40,000 | 2 | $80,000 |
Marketing software costs and fees | $10,000 | 1 | $10,000 |
External service costs | $10,000 | 2 | $20,000 |
Overhead costs | $5,000 | 1 | $5,000 |
Total Costs: | $150,000 | ||
Once you factor in elements like overhead costs, fees for external consultations or support, and software costs, the actual CAC for Here Comes the Bride and Groom is $100.
|
||||||
|
||||||
|
||||||
|
||||||
You can use our advanced CAC calculator below to determine your customer acquisition cost.
Importance of CAC
Apart from determining the cost to acquire customers, your organization’s CAC is important for a myriad of reasons. Firstly, it’s a strong indicator of the success—or failure—of your marketing campaigns. Understanding CAC can help you determine the overall return on investment (ROI) you’ll see within the coming weeks and months. It’s also useful when determining each customer’s lifetime value (LTV).
To calculate a customer’s LTV, you’ll need to use a formula like this:
Customer Lifetime Value = Customer Value × Average Customer Lifespan
where,
Customer Value = Average Purchase Value × Average Number of Purchases
and
|
||||||
When determining customer value, simply multiply the average purchase amount by the average purchase frequency. For the former, divide your organization’s annual revenue by the total number of purchases; for the latter, divide the total number of purchases by the number of unique customers.
Once the above calculations are complete, multiply the customer value by the lifespan of the average customer. The resulting figure is the customer’s LTV, which can easily be compared to your CAC in a ratio format.
For most industries, an acceptable LTV:CAC ratio is 3:1. In this case, the customer’s lifetime value is three times greater than their acquisition cost. Determining the LTV:CAC ratio makes it easy to control spending habits in the future. It’s also useful when trying to reduce your organization’s overall CAC.
How to Reduce CAC
If your LTV:CAC ratio is lower than 3:1, or if you just want to increase your profit margins, you’ll need to take some steps to reduce your CAC to an acceptable level. Thankfully, there are some proven techniques that you can incorporate into your sales management practices to keep CAC at a minimum.
- Use conversion rate optimization (CRO): Start by optimizing your website and mobile app to make it as easy as possible for potential customers to find your product and make a purchase.
- Implement CRM software: Dedicated customer relationship management (CRM) software helps you track leads and customers throughout the entire process, from initial contact to the final sale.
- Start a customer referral program: Customers that reach out to you because of a direct referral have a CAC of $0. Also known as “free customers,” these customers will reduce your CAC over the course of time—especially if you receive a lot of them.
- Cater to customer needs: Instead of worrying about attracting leads to a brand new product or service, try to design something that is inherently useful to your target audience.
- Improve the customer experience: Add value to your product or service whenever possible. This could come in the form of updates, fixes, or even complementary products and services.
For best results, try to use a combination of the above strategies. Not only will they help you reduce your overall CAC, but they’ll help you improve customer satisfaction and retention scores, too.
FAQs
The act of calculating your organization’s CAC can be confusing. If you have any remaining questions, make sure to check out our FAQ section below for more information.
In B2B sales, companies in higher education have an average CAC of $1,143—the highest of any industry, while the commerce industry has the lowest CAC at $86. In the software as a service (SaaS) industry, companies in fintech have the highest CAC at $1,450, while ecommerce has the lowest at $274. For ecommerce businesses, the jewelry sector has the highest CAC at $91, while food and beverage comes in last at $53.
Even though the two terms are often used interchangeably, CAC is not the same as cost per acquisition (CPA). While CAC measures the cost of acquiring a paying customer, CPA refers to the amount your organization spends in order to acquire a nonpaying customer. This could include new user registrations and customers who sign up for a free trial.
When calculating CAC, we should not include marketing and advertising costs that only target current customers, costs related to ongoing customer retention, and customer training and technical support costs. Remember, CAC refers strictly to new customers. Any efforts applied to your existing customer base aren’t included when calculating CAC, as these customers have already been acquired at an earlier date.
Bottom Line
Customer acquisition cost is one of the most important business metrics in use today. Now that you know how to calculate CAC, you can better understand your customer base, control costs, and identify bottlenecks that can help you drive profitability. Aside from that, our tips on how to lower CAC can further help you improve your profit margin and customer satisfaction.
