Tracking the amount of money you spend on customer acquisition can be challenging, especially if you use numerous different channels for marketing.
Here, we've made it easy for you to work out your customer acquisition cost (CAC) with our calculation formula.
Key takeaways:
- Customer acquisition cost is the amount of money that you spend to acquire a new customer.
- Determining your customer acquisition cost will help you to understand how the cost of acquiring customers compares to the money that customers put into your business.
- Once you know your customer acquisition cost, you can determine the effectiveness of your marketing campaigns and work on boosting your return on investment (ROI).
How to calculate the cost of customer acquisition: step by step
Let's start by looking at the step-by-step process of calculating the cost of customer acquisition.
Step 1: Choose a time period
Choose the time period that you want to calculate your CAC. It's best not to be too broad (5+ years) or too specific (less than 1 month) here. You might choose to look at the past month, quarter, or year.
Step 2: Gather your data
You'll need your marketing expenses and information on the number of customers acquired within the specific time period.
Step 3: Calculate CAC
You can now use the customer acquisition cost (CAC) formula below to work out your average customer acquisition cost within this time period.
Step 4: Compare & adjust
Once you know your CAC, you can compare it to other business metrics or customer acquisition costs for previous years or quarters to measure your business' profitability. You can also use your CAC data to adjust your sales and marketing practices to get more value from your customers.
Customer acquisition cost formula
Here's the formula for working out customer acquisition cost:
Cost of marketing and sales/Number of new customers acquired = customer acquisition cost
So, let's say you spend $10,000 in a given year on sales and marketing, and in that year, you acquire 75 new customers.
Following the formula above, the sum would be:
10,000/75 = $133.33
That means your customer acquisition cost for the year in question is $133.33.
What you need to calculate customer acquisition cost
So, we know the formula to work out the cost of customer acquisition, and that the data we need includes the number of customers we served and the amount of money we spent in a given time period.
You can choose the time period that's best suited to the information you want to know. For instance, you might want to work out your spend and earnings in the last year or fiscal quarter.
What exactly is included in the cost of sales and marketing?
Sales and marketing costs should encompass the following:
- The amount of money you're spending on advertisements (ad spend).
- The money you spend on producing content (creative costs).
- The cost of paying your employees in sales and marketing roles (salary costs).
- The amount of money you spend on technology that supports your marketing and sales campaigns (technology spend).
- Additional costs associated with physically producing and publishing content (production and publishing costs).
It's easier to gather data on your customers. You simply need to know how many customers spent money on your product or service in the given time period.
What is customer acquisition cost?
Now we know how to calculate customer acquisition cost (CAC), let's make sure we understand exactly what this means.
Customer acquisition cost is a business metric that tells you, on average, how much you spend on acquiring customers within a specific period of time.
CAC can help you to determine your business' profitability by comparing your sales and marketing costs to the money brought in by your paying customers.
You can get an even better sense of your profitability by comparing your CAC with your customer lifetime value (LTV), because this figure tells you approximately how much money you can earn from your customers based on how long they stick around.
Why is customer acquisition cost important?
The main reason why customer acquisition costs are important is that they can help you to adjust your marketing spend - and spend your money more wisely.
You probably invest a lot of money into your sales and marketing efforts. To begin with, there's an understandable amount of trial end error involved as you test and compare different methods of attracting customers. It'll be difficult to keep track of what's working and what isn't if you don't use some sort of metric, like customer acquisition cost.
You can use CAC to evaluate the effectiveness of your marketing campaigns. Once you know how much money goes into attracting the average customer, you can put plans in action to make your marketing processes more efficient, perhaps by spending more on methods that are proven to be effective and spending less on methods that have lower success rates.
Ultimately, by keeping track of your customer acquisition costs and strategizing to reduce these costs, you should be able to boost your return on investment.
However, CAC isn't the only important business metric. Retaining customers should cost you less than finding new customers, so it's also worth evaluating your customer retention, which contributes to your bottom line.
What's a good customer acquisition cost?
The goal of any business is to reduce customer acquisition cost. The lower the cost of acquiring new customers, the higher your return on investment (ROI).
There is no definite figure for a good customer acquisition cost. There are factors that affect how much you should be spending, or have to spend, on acquiring customers, including:
- Your industry
- The size of your business
- The cost of the products/services you sell
- The average customer purchase frequency
- Your average customer lifespan
Let's look at these factors in more detail.
For instance, a digital security agency might have a customer acquisition cost of $75, meaning that it spends roughly $75 to acquire each new customer.
This seems quite high, but the company charges a fixed fee of $50/month for its security services, with a minimum contract of 6 months. So, the cost of acquiring its customers is only about one-quarter of each customer's minimum spend.
On the other hand, a protein supplements company might have a customer acquisition cost of $25. This is quite low, but the average cost of a supplement sold by the company is $35, and there's no guarantee of repeat service.
Rather than looking at a certain spend, you should look at the ideal customer acquisition cost ratio.
Your customer lifetime value should be three times the cost of your customer acquisition cost, so the LTV to CAC ratio is 3:1.
That means the money that a customer puts into your business should be around three times the amount of money that you spend to acquire the customer.
This is naturally easier to achieve with some business models than others. For instance, if you sell a recurring service with optional upgrades, you'll find it easier to hit this 3:1 ratio than if you sell a product that customers only need to buy once.
Contrary to assumption, your aim isn't to reduce customer acquisition cost as much as possible.
If your LTV to CAC ratio is 4:1 or 5:1 (meaning that customers are bringing in 4 to 5 times the amount of money it cost to acquire them), you might not be putting enough money into your sales and marketing efforts, meaning you're missing out on potential opportunities to acquire even more new customers.
Is customer acquisition cost an accurate metric?
How much can you rely on customer acquisition cost? How accurate is this metric?
Customer acquisition cost isn't 100% accurate because it doesn't account for returning customers that may have already bought from you before.
For instance, let's say a customer buys a handbag from your eCommerce store, then doesn't visit your site until 2 years later, when they're "reactivated" by an Instagram ad.
Technically, this customer is a returning customer, but they've only been drawn back to your website because of your marketing efforts, so they'll usually be classed as a new customer as far as customer acquisition cost is concerned. That means your CAC may be a little off the mark, depending on how many similar returning customer scenarios you face.
If you want your CAC to be as accurate as possible, use a trusted analytics software to determine which customers have visited your site in the past.
Or, if you have an effective method of logging all your past customers, a returning customer may be flagged in your system, and you can exclude them from your new customer count when calculating CAC.
How to improve customer acquisition cost
Calculating the cost of acquiring customers is the best place to start - but there's no use sitting on this information.
Once you know how much you're spending to acquire new customers, you can work on lowering your CAC and improving your marketing efforts to bring you more value from each customer.
Here are a few ways you can improve your customer acquisition costs:
Sell to the right customers
The first method of reducing your costs to attain new customers is the most obvious but often the most difficult to achieve: make sure you're selling to the right customers.
Your marketing expenses won't take you anywhere if you're targeting the wrong crowd.
If you're unsure how to find the right customers, here are a few tips:
- Look at the customers you already have. It's likely that your new customers will have at least one major thing in common with your existing customers.
- Determine your ideal customer's purchasing habits. How do they find products or services online? Do some market research to find out.
- Don't aim to serve everyone. Target your products or services to those who need them. Who did you have in mind when you started your business?
No amount of marketing, ads, or sales will bring in an influx of customers until you know who it is you're supposed to target.
Retarget your customers
An estimated 3/4 of shoppers leave a website without completing a purchase. There are all sorts of reasons why a customer might leave without making a purchase - they get distracted, they decide to shop around and eventually forget what they were doing, or they find a better deal elsewhere.
In the first two scenarios, you may be able to retarget your customers by reminding them what they have left behind. These retargeting ads will be shown to customers who search for related terms on Google or browse websites on the Google Display Network.
Retargeting is an effective way to reduce your CAC because it targets customers who are definitely interested in what you have to offer, so you have a higher likelihood of convincing them to make a purchase than you would with somebody who has never visited your website before.
Focus on retaining customers
Acquiring a new customer costs around 5 times as much as retaining a current customer, so it makes sense that improving your customer retention will reduce your revenue and average cost of customer acquisition.
If you retain customers and increase their overall spend with your business, the cost of acquiring these customers will be lower in comparison - and therefore more justifiable.
There are a few ways you can improve your customer retention, including:
- Encouraging customers to create an account and sign up to your email list.
- Sending engaging emails that feature occasional offers, discounts, and "new in" announcements.
- Sending customers a "thank you" discount after their initial purchase.
- Improving your customer support, the buying process, and shipping times to facilitate the best purchasing experience.
Find out how to offer value that keeps customers coming back. This is easier for some business models than it is for others, but regardless of what you sell and how you sell it, it's likely that you can improve your CAC by working on retaining your customers.
Optimize your landing pages with A/B testing
Testing and retesting your current methods of acquiring customers should help you to reduce your marketing spend and lower your average customer acquisition cost.
Use A/B testing on various sections of your landing pages to learn what words, graphics, or layouts customers respond best to. A professional marketing content writer can work with you to leverage your landing page content with a creative headline and compelling benefit statements. Continue testing until you hit the jackpot and discover a format that works best for attracting new customers.
If something doesn't work and you get fewer clicks on the "buy now" button, simply reverse your most recent alteration.
The most successful companies have, more often than not, only achieved high landing page conversion rates through extensive A/B testing. Once you find the formulas that work for you, you should be able to reduce your money invested in digital marketing and lower your CAC.
Establish an affiliate program
One of the most effective ways to reduce costs associated with your own sales and marketing staff is to try an affiliate program. Affiliate programs are hugely popular, and some of the best-known businesses have their own.
Affiliate programs are where other websites - known as affiliates - use their influence to promote your products on your behalf. The affiliate gets a certain cut (usually around 2%-15%) of any sale made with their link, so you may lose a small percentage of your profits - but affiliate schemes are still a great way to reduce your overall spend on acquiring customers.
You could also consider influencer marketing programs, which are similar, but often involve paying the influencer a certain lump sum upfront, regardless of how much money they bring to your business.
How to benchmark customer acquisition cost
To use your CAC as a point of reference to compare other costs (including CACs for future time periods) against, you need to keep a few important metrics in mind.
First, you should be spending less on your CAC than you're receiving from your customers. This might seem obvious, but things get trickier when customer profit margins and lifetime value are factored in. Monetization that's low in the short term may not seem so bad over a longer time period.
Next, aim to recover your spend on acquiring customers within 12 months. Your customer should have paid as much back into your business as what you spent to acquire them within their first calendar year.
Additionally, it's a good idea to use gated content, like customer email addresses, and measure how long you generate leads with this content. If your gated content is effective, you'll enjoy months of successful lead generation. You can measure the worth of your investment by comparing your most recent gated content with your previous attempts.
Finally, track shares in your social media content. Only the most content that's most valuable to customers is shared. So, if your content shares are on the increase, and you're seeing a correlation with more customers buying from your business, you know you're doing something right.
Final word
Knowing your customer acquisition cost (CAC) is essential because it determines the cost of growing your business and attracting new customers. Monitoring and adjusting your CAC will ensure you're putting enough money into your sales and marketing efforts without spending so much that your profit margins are sacrificed.
Ultimately, there isn't a benchmark figure that you can use as an example of a good CAC, since this number varies from business to business, and is also affected by factors including the cost of your products and your average customer lifespan. However, it's good to try to achieve a CAC:LTV ratio of 1:3, meaning that your customers pay three times as much into your business as you spent on acquiring them.
Be sure to remember that there's more to measuring profitability than simply the cost of acquiring customers. Also, consider your customer lifetime value, which gives you the best understanding of the long-term financial reward you can expect from the customers acquired by your business.
If your end goal is to reduce CAC, it's really about working smarter, not harder. Employing an effective content writing strategy for your website will go a long way to enticing potential customers and helping to reduce the costs associated with convincing leads to convert.
FAQ
What is formula of CAC?
The formula for calculating CAC is: "cost of marketing and sales/number of new customers acquired = customer acquisition cost". So, to use this formula, you need to know your marketing and sales spend within a given time, and how many customers you acquired in this time frame.
How do you calculate CAC example?
Calculating CAC is easy: you just divide your total cost for sales, marketing, ad spend, and other customer acquisition methods by the number of new customers you acquired within a specific time period. For example, if your business spends $100 on marketing and acquires 50 customers, your customer acquisition cost is $2.
What is a reasonable customer acquisition cost?
There's no reasonable customer acquisition cost for all businesses because of all the different factors that affect different industries. Instead of focusing on a certain number, it's best to work towards a CAC:LTV (lifetime value) ratio of 1:3, meaning that your customers bring in three times the amount of money that you spend on acquiring them.
What is a good customer acquisition cost for B2B?
Again, there's no set customer acquisition cost that's considered good in B2B, since this cost may vary from one industry to the next. However, the cost of acquiring B2B customers is usually significantly higher than the B2C CAC. This article shares a handy table of the average CAC for a number of B2B industries.
Is customer acquisition cost a KPI?
Yes, customer acquisition cost is a KPI because it's one of the metrics that can be used to measure your business' performance. CAC is becoming an especially popular KPI in the age of digital marketing, which gives businesses a much larger pool of potential customers and makes it easier to adjust their marketing and sales efforts with A/B testing to improve their overall performance and profitability.
What is the difference between CAC and CPA?
The difference between CAC (customer acquisition cost) and CPA (cost per acquisition) is that CAC is a measurement of the cost of acquiring a paying customer, while CPA measures the cost of acquiring any lead (such as a registration or a trial signup) - which doesn't necessarily result in a sale.
