What Is the Customer Acquisition Cost?
Customer Acquisition Cost Definition
Customer acquisition cost(CAC) is an important business metric. It refers to the money and resources a company needs to get a new customer. CAC is useful for businesses to measure the customer lifetime value to measure the customer’s value to the table.
Customer acquisition cost (CAC) is a metric used to reflect the cost of convincing (acquiring) a potential customer into buying the product or subscription of service.
Companies and investors both use CAC.
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 actual number of customers they gain.
If expanding your customer base and still making a profit is your business goal, you must read on and understand the customer acquisition cost, its importance, and how you easily calculate it.
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 cost includes marketing snd programming costs, 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 period for calculating the customer acquisition cost. The period can range from monthly, quarterly, or yearly.
Once you determine the time range, you successfully narrow down your scope of data.
Now 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 estimated customer acquisition cost.
Customer acquisition cost formula :
Customer acquisition cost = (cost of sales + marketing) ÷ number of new customers.
Once you calculate the customer acquisition cost for your company, you can now 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 as they can suggest a more budget-friendly way that can be applied for marketing purposes and reject 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 from the rural areas for minimum wages.
Since the software is cloud-based, the cost of distribution is low. The customers require very little 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)
Cusotmer aqusition cost: $2.00
The cusotmre lifteie valiuue 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 the revenue of $2,000. The amount of revenue is attractive to the inventors, and it also means that the marketing team is putting in equal effort and is succeeding.
Customer Acquisition Cost vs. Lifetime Value
Customer acquisition cost has its basis in sales and marketing departments. CAC measures the total cost a company spends on converting or acquiring a new customer from the people who view your advertisement.
A company’s customer acquisition cost includes everything from billboards and physical signs to 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.
Ideally, the LTV to CAC ratio should be 3:1, which means the revenue generated from a customer should be three times the cost incurred in acquiring the customer.
Lesser than this means that you should cut down your CAC. More indicates that you are spending less on marketing.
The company must be able to recover the customer acquisition cost within the first 12 months or so. For example, if the average customer brings in $1,500 for 50 months, you must spend $360 on customer acquisition.
To capitalize on customer acquisition costs, they must be incremental. Businesses count lead generation costs in expenses incurred.