Customer Acquisition Cost (CAC) - What is CAC?
Customer Acquisition Cost (CAC) is a metric used to determine the cost to a business for gaining a new customer
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The use of CAC by businesses can be an important metric for understanding how much money is being spent in order to gain new customers. It takes into account the costs incurred by the business on sales & marketing, salaries, etc. that contributed to converting a customer.
It’s a useful metric because it gives a business direct insight into how much money went into attracting and converting a customer compared to the number of customers that they actually attained in that period.
Traditional methods for measuring the cost of a customer are significantly harder to track but the digitisation of businesses provides tools that give quick access to the information needed to determine the CAC for a business.
Costs involved in acquiring customers
While the ‘marketing costs’ element in the formula for determining customer acquisition cost might seem obvious, there are in fact a variety of different expenses that a business might encounter that should be included in this total for determining the CAC.
- Advertising costs: for example, a Google Ads campaign. These costs are those that go directly to adverts for a business. Marketing campaigns should be developed carefully and strategically to resonate with the target audience.
- Tools & tech costs: how does a business measure the effectiveness of marketing campaigns? What about the website? These costs cover the tools that are used to track and measure these numbers.
- Content/creativity costs: every good campaign has a creative source. The hours invested by those who create content for a marketing campaign, content for website, but also even a brainstorming lunch meeting for example.
- Salary/wages: the cost of employing the people working on advertising, content, etc. involved in the acquisition of new customers factors in to the CAC.
- Production costs: this involves any costs involved in creating parts of a marketing campaign such as video equipment, editing software, or if you hire outside help to contribute to the production of an endeavour to acquire customers.
- Inventory maintenance: while a business is focused on acquiring new customers, it’s important to keep a steady inventory to have availability in the event that a campaign takes off. These costs should be included in the CAC.
Depending on your business, some or all of these can apply to the total costs involved in gaining new customers. You might also need to consider other costs that are associated with customer acquisition.
As mentioned above, the equation used for calculating the CAC is quite simple but care should be taken to ensure that all of the associated costs are included in order to get a more accurate number.
Customer Acquisition Cost = Cost of sales + marketing / Number of new customers
The numbers can be combined for a total period (for example, if you’re looking at a full year). This means adding all relevant costs and all the total new customers over the entire period.
Example of CAC calculation
Janet manages all of the marketing for a business. Her salary is £35,000. Over the last year, there have been 3 marketing campaigns to acquire new customers. To calculate the CAC for the year, they add together everything spent on the campaigns divided plus Janet’s salary by the total number of customers they gained: CAC = 35,000 + 500 + 600 + 450 / 280 + 300 + 250 = 44.04
The costs for customer acquisition for this company can seem high, however this can be because they are a startup or are currently investing in other areas of the business. The CAC can be reduced by increasing the number of customers gained as compared to the amount spent.
A CAC for businesses to aim for generally involves the Customer Lifetime Value measurement. In this case, an ideal ratio is cited as 3:1 for CLTV:CAC.
Why CAC is important to businesses
Investors in particular will look at the CAC of a business for a specified period as one of the main metrics to help determine profitability. A lower CAC means that a business is becoming successful at using marketing and sales campaigns to convert customers.
Becoming more efficient with marketing strategies can mean major savings and growth for a business. The next step is to create a positive experience for customers to prevent churn and encourage positive word of mouth.
1. CAC and ROI
The cost of acquiring customers is an important part of a business having a grasp on their overall return on investment (ROI). It is often used to determine the best way to acquire customers - for example, if an online campaign is shown to have a better CAC rate than a booth at a local market.
2. CAC and profit
Determining the CAC allows a business to see just how valuable a customer is and whether any steps need to be taken to potentially improve the profit margin. Understanding the best marketing strategies for a business can significantly increase profitability.