Customer Acquisition Cost: What It Is & How to Calculate

What Is the Customer Acquisition Cost?

Alright, friends, We’ve been seeing a lot of talk lately around this concept of “customer acquisition cost” or CAC. Let me explain a bit about what it is.

Customer acquisition cost (CAC) is a metric used to reflect the cost of convincing (acquiring) a potential customer into buying a product or subscription to a service. 

The customer acquisition cost is how much money it takes to gain a new customer. Companies divide all their customer acquisition marketing spend for a given period – things like ads, promotions, partnerships, etc.- by the total number of new customers gained from that spending.

Most businesses pair the customer acquisition cost with another metric, customer lifetime value (LTV), which measures a customer’s total revenue over time. A company’s customer acquisition cost includes total sales and the marketing cost needed to get a new customer on board over a period of time.

Customer acquisition cost is a crucial business metric because it determines the profitability of a business. It compares the company’s money on acquiring new customers versus the number of customers they gain. If expanding your customer base and making a profit are your business goals, you must read on and understand the customer acquisition cost, its importance, and how you can easily calculate it.

For example, say your company spent $50,000 on marketing last month, resulting in 100 new customers. Your CAC would be $50,000/100 new customers = $500 per customer.

It’s an essential metric for businesses because customer acquisition is often one of the most significant expenses, especially for e-commerce brands or SaaS startups. Ideally, you want your CAC to be lower than the lifetime value you expect to generate from each customer.

Some things that influence CAC are your marketing channels, creative content, targeting approach, offers/incentives, conversion rates, and more. Over time, savvy companies find ways to optimize and lower their CAC through testing and data.

Tracking your CAC helps you understand if your marketing spend is efficient or adjustments are needed. Pretty important data point for any business aiming to grow sustainably!

What Can You Include in Customer Acquisition Costs? 

As we will see in the customer acquisition cost formula, it includes the total sales and marketing costs. Customer acquisition costs include marketing and programming, commissions, salaries, bonuses, and the costs needed to attract new leads and convert them into potential customers.  

Total customer acquisition cost includes: 

Advertising and marketing costs, cost of your sales team, creative costs, technical costs, publishing costs, production costs, and inventory upkeep.

How To Calculate Customer Acquisition Cost?

Before we get into how to calculate customer acquisition costs, we will look at what you need to determine first.

As a business, you need to determine the customer acquisition cost period. The period can range from monthly, quarterly, or yearly. 

Once you determine the time range, you successfully narrow down your scope of data.

Add the total sales and marketing expenses and divide that by the number of new customers you got on board during that period. 

The result will be your company’s estimated customer acquisition cost. 

Customer acquisition cost formula:

Customer acquisition cost = (cost of sales + marketing) ÷ number of new customers.

Once you calculate your company’s customer acquisition cost, you can compare it with the other critical business metrics.

These comparisons will give you valuable insights into sales, customer service campaigns, and marketing.

Why Is Customer Acquisition Cost Important?

CAC is valid for both investors and the company. 

Investors study the CAC data to estimate the company’s capabilities and reach over the market.

• CAC figures can help improve the return on investment by suggesting a more budget-friendly way that can be applied for marketing purposes and rejecting those methods that aren’t giving positive returns.

• Proper analysis and reduction of CAC help better understand value per customer, which results in better profit margins.

• You can study CAC parallel to LTV (customer lifetime value). The pairing of these two metrics gives more refined information on costs incurred per customer and the value.

What Are Examples of Customer Acquisition Costs?

We will first look at the customer acquisition cost example for the consumer goods company.

Customer acquisition cost example 1:

A consumer goods company spends $3,000 and $7,000 in marketing and sales, respectively. They aim to attract 1,000 new customers. 

Using the customer acquisition cost formula, we get:

CAC= ($7,000+$3,000) ÷ 1,000 = $10

Therefore, the consumer goods company’s total customer acquisition cost to acquire one new customer is $10.

Customer acquisition cost example 2:

A well-established CRM company with good search engine results and a sales team. The employees work in the rural areas for minimum wages. 

Since the software is cloud-based, the cost of distribution is low. The customers need more support.

The company gets good customers because of its strategic partnerships.

The costs will be as follows:

• Total monthly spending on SEO: $20,000/- yearly
• Total cost paid to partners per customer: $1.00
• The total cost of new customer sales support is $1,000,000- yearly

New customers the company acquires per year are: 1,020,000

CAC = ($1,000,000 + $20,000) / 1,020,000 = $1 + $1 (per customer for strategic alliance)

Customer acquisition cost: $2.00

The customer lifetime value will be $2,000. 

It means that the customer acquisition cost of $2.00 that the company spends to acquire the new customer gets converted into revenue of $2,000. The income is attractive to the inventors, and it also means that the marketing team is putting in equal effort and succeeding.

Customer Acquisition Cost vs. Lifetime Value

Customer acquisition cost has its basis in the sales and marketing departments. CAC measures the total cost a company spends on converting or acquiring a new customer from those who view your advertisement.

A company’s customer acquisition cost includes billboards, physical signs, social media campaigns, and online advertising.

Companies include all of these costs in their CAC.

The customer acquisition cost formula, when you open it, looks something like this:

Customer acquisition cost (Advertising costs + payroll costs + design costs + other associated costs) ÷ number of customers the company gains

On the other hand, customer lifetime value is a metric that marketers often use.