Customer Acquisition Cost (CAC)
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Landing a new customer feels great, but it usually ain’t free. Every business tries to figure out: how much does it cost to get one in? That’s when customer acquisition cost comes into picture.
But hold on. That’s just an overview.
There are nuances to it.
So, let’s break down the concept of customer acquisition cost in detail step by step.
What is customer acquisition cost (CAC)?
Customer acquisition cost, popularly known as CAC, is the total amount of money a business spends to acquire a new customer over a specific period of time. It’s one of the most important growth metrics for assessing sales efficiency and profitability of a business.
CAC, typically, includes the total cost of sales and marketing required to influence a customer to buy a product or marketing.
For example, cost of sales and marketing may include expenses such as salaries, ad spend, bonuses or any other expenses that are directly related to attracting a new lead and converting it into sales.
A lower CAC suggests efficient sales and marketing management for a business. While, a higher CAC suggests that a business’s sales and marketing efforts are not optimized.
What are the different types of customer acquisition costs?
Customer acquisition costs have many layers into it.
Based on customer types, marketing and sales channels, product lines etc. we can segment CAC into more niche and specific categories that helps you especially during the analysis of acquisition cost.
Here are some of them:
- Initial CAC: It’s the cost of acquiring a new customer for the first time. This is what we usually refer to as ‘CAC’ in the general usage.
- Reactivation CAC: The cost of acquiring an old customer that had churned previously.
- Renewal CAC: The cost of continuously engaging with an existing customer. This can be further broken down into first-time renewal CAC, second-time renewal CAC and more.
- Market CAC: This is the cost of acquiring a new customer in a specific market or region( e.g., EMEA, APAC, US) or by sector verticals.
- Customer CAC: It’s usually the cost of acquiring a new customer based on certain demographic profiles such as gender, age, profession etc.
- Product CAC: It includes the cost of acquiring a new customer for a specific product or service.
- End users CAC: This metric is useful especially for B2B SaaS businesses. It accommodates the cost of acquiring an actual user of a product or service, rather than just the purchasing entity.
For example, if a company buys software licenses for its sales teams. The end users CAC will be calculated by dividing the total acquisition costs by the number of individual users who will actually be using that software.
Why is customer acquisition cost (CAC) important?
As discussed earlier, CAC is a pivotal metric for any business. Here’s a comprehensive analysis of why it is important:
1. It helps a business determine its profitability and ROI.
It is integral to determining the ROI for sales and marketing activities of any business. A lower CAC suggests that a business is gaining customers without overspending, thus maintaining healthy profit margins.
2. Determining CAC supports the marketing budget allocation.
By identifying the channels that yield the lowest and the highest CAC, a business can optimize their spending to acquire more customers in less money.
3. CAC impacts the pricing strategy of any business.
Usually businesses price their product or service on the basis of customer acquisition cost. For sustainable profitability, businesses usually set their pricing that covers their customer acquisition cost.
4. Low CAC is a key indicator of any business’s growth and scalabitity.
Businesses try to lower their CAC to acquire customers for growing their customer base with lower spending. This is particularly helpful for startups and growth-stage companies to attract investors.
5. CAC helps a business compare its customer LTV.
Businesses usually compare their CAC with LTV to assess the long-term value of the customers they bring onboard.
A high LTV coupled with lower CAC suggests that the cost a business incurs in acquiring a customer is lower than the revenue it generates from the same customer which is ideal for the long-term revenue sustainability of a business.
6. Customer acquisition cost helps a business compare its performance in the industry.
A business can compare its CAC with that of the industry average benchmarks to gauge their business performance and strategize accordingly.
What type of costs to include in the CAC calculation?
So far we have learnt that CAC includes the marketing and sales expenses. Now let’s see the detailed breakdown of several costs that one should consider while calculating CAC.
Fundamentally, we can segregate these costs into 5 different categories, like this:
Marketing and advertising cost: This includes the expenses for digital + traditional advertising. E.g., the cost of running Google ads, social media marketing, SEM, newspaper advertising, newspaper, banners, business flyers etc.
Employee wages: They include the salaries, commissions and wages given to the sales and marketing staff.
Softwares and tools cost: This can include the amount spent on buying software licenses, subscribing to sales enablement softwares, any analytical tools etc.
Overheads cost: These are typically the hidden costs associated with marketing and sales operations. E.g., traveling expenses, events, free trials etc.
Outsourcing costs: Make sure you include the costs associated with outsourcing marketing or sales activities. E.g., contract with the freelance graphic designers, video editors, lead generation agency etc.
How to calculate the customer acquisition cost?
Let’s see the step by step process for calculating CAC.
Step 1) Determine a time frame
Determine the specific period during which you want to calculate the CAC of your business. It can be monthly, quarterly or yearly.
Step 2) Aggregate all your marketing expenses
Add up all the money you spent in running your marketing operations such as
- Running ads ;
- Salaries of the marketing team ;
- Licensing cost of the marketing softwares and tools and
- Any other relevant cost to the marketing initiatives.
Step 3) Aggregate all your sales expenses
Similarly, add up the costs you incurred in running your sales activities such as
- License cost of CRM and other sales softwares
- Sales team salaries and commissions
- Training and development cost of the sales team
- Any other sales related expenses
Step 4) Calculate the acquisition cost
Now add the marketing + sales related costs (as mentioned in the step 2 and step 3) to get the overall cost for customer acquisition for a specific period of time.
Total Acquisition Cost = Total cost of marketing + Total cost of sales
Step 5) Find out the total number of new customers acquired
Now you have to determine the specific number of new customers you gained during that same period of time you have considered your marketing and sales costs.
Step 6) Apply the CAC formula
Use the following formula to calculate the CAC:
CAC = Total Acquisition Cost / Number of new customers acquired
Step 7) Analyze and interpret CAC
Finally, you have got the figure for the CAC. Now, compare this with the other key metrics of your business such as LTV to assess the ROI.
Customer acquisition cost (CAC): Examples
Let’s take a look at how CAC is calculated in multiple business scenarios.
1. E- commerce
Let’s take an example of an online D2C fashion brand, XY fashion. They entirely rely on marketing to acquire new customers. They incur the following expenses quarterly to acquire new customers:
- Social media advertising (Instagram, Meta, Youtube Ads) – $2000
- Influencer Partnerships – $1000
- Email marketing – $600
- SEO & Content Marketing – $1200
- Discount & promotions – $400
Their total marketing spend = $5200 ; They acquire 600 new customers during this period. Their CAC = $5200 / $600 = $9 per customer.
This CAC is considered good if the average customer spends more than $9 on their first purchase at the website of XY fashion and has a high lifetime value.
2. B2B SaaS
Let’s take an example of a B2B SaaS business iReport who provide B2B analytics and reporting services. Their CAC will be calculated like this –
- Online webinars – $5000
- PPC ads(google ads, meta ads) – 8000
- Sales team salaries and commission – $16000
- Trade shows and events – $6000
Their total marketing and sales spending = $35000 , assuming iReport gains 116 new customers, their CAC will be = $35000 / $116 = $302 per client.
3. Manufacturing
A manufacturing company, Xbuilds, specializes in manufacturing equipment. They might have the following CAC:
- Industry publications and ads – $4000
- Sales team travel expenses – $3000
- Product demo – $2000
- Customer referral program – $1000
Their total marketing and sales spending = $10000. With this amount they signed 13 new contracts, thus their CAC = $10000 / $13 = $770 per contract.
These are some of the most common business scenarios where acquisition cost is calculated.
How to reduce customer acquisition cost ?
To reduce Customer Acquisition Cost (CAC), businesses should focus on optimizing their marketing and sales strategies.
This may include targeting the right audience efficiently, enhancing conversion rates through streamlined user experiences, and leveraging organic growth channels like SEO and content marketing.
But that’s not all.
There are more ways you can reduce and improve your business’s CAC. We have discussed those in details in details in our blog.
Industry benchmarks for customer acquisition cost
Customer acquisition cost usually varies depending on industry, business model, average sales cycle, average order value, purchase frequency, LTV etc.
We have compiled a list of average CAC of 29 B2B industries based in US.
Also, for B2B SaaS, here are 22 industries that you can refer to compare your business performance.
F.A.Q
Let’s look at some of the most commonly asked questions on CAC.
Q. How often should I calculate CAC?
CAC should be calculated regularly. Try to calculate it monthly or quarterly to keep track of the effectiveness of your marketing and sales efforts.
Q. Is a lower CAC better?
Apparently a lower CAC suggests cost-effectiveness. But for an in-depth analysis, try to pair it with customer lifetime value and the customer quality for a holistic view on long-term profitability.
Q. How does CAC vary across industries?
CAC primarily varies across industries due to the difference in sales cycles, product costs, average order values, stages of the businesses, marketing and sales strategies etc.
Q. How do you calculate the cost of acquisition?
To calculate the cost of acquisition, add marketing and sales expenses for a specific period of time. Refer to the “How to calculate the customer acquisition cost (in 7 steps)” of this article for more information.
Q. Does CAC include salaries?
Yes, CAC includes the salaries of the marketing and sales staff of a business. For a detailed breakdown of the costs, refer to the “What type of costs to include in the CAC calculation?” section of this article.
Q. What is the CAC formula?
The CAC formula = ( total cost of marketing + total cost of sales ) / Number of new customers acquired