CAC, short for customer acquisition cost, is a key business metric used globally to estimate the resources necessary to attract and acquire new customers.
Hence, if you want to further expand your customer base and still make a profit, it’s crucial you understand what CAC is, how to calculate it, and what actions you can take to lower it.
That’s exactly what this guide is about. Read on to learn about:
- What is Customer Acquisition Cost (CAC)?
- Why is CAC Important?
- How to Calculate CAC?
- Examples of CAC
- 7+ Ways to Lower Customer Acquisition Costs
What is Customer Acquisition Cost (CAC)?
CAC refers to the total sales and marketing costs that it takes to acquire a new customer. In other words, it’s simply what a company has to spend to convert a lead or prospect into a buying customer.
The expenses that go into CAC vary depending on your specific industry and
Resources. That said, they usually include:
- Salaries of salespeople and marketing employees
- Sales commissions
- Trade show costs (including travel expenses)
- Advertising costs (direct mail campaigns, display ads, social media, etc.)
- Paid sponsorships
- Telemarketing
- Web design (website, print advertising, etc.)
Now, your business may incur additional sales and marketing expenses, not included in the above-mentioned list. Hence, in order to accurately calculate your customer acquisition cost make sure that all your sales and marketing costs are added up together.
Otherwise, you could unintentionally compute an artificially favorable CAC.
Why is CAC Important?
Customer acquisition cost essentially measures how much value a customer brings to the business and the Return On Investment (ROI) of their acquisition.
Let’s break down what this means.
Say it costs a total of $300 in marketing and sales expenses to get a customer through the door and to make a purchase, but their total buy only amounts to $200. Continuously having such a CAC, which is higher than the actual revenue streams coming into the company, is not viable business as, eventually, you will go bankrupt.
Now, the good news is that this is easily preventable, as long as you’re consistently aware of what your customer acquisition costs are. That way you can gain insights into which segments are most efficient and profitable, such as pricing effectiveness, churn rate, and customer success.
Measuring CAC is also important to external stakeholders, such as investors. That’s because they want to be able to compare how much money you extract from customers, with the costs of obtaining this money, to determine your overall profitability as a company.
How to Calculate CAC?
The very first step in calculating your customer acquisition cost is to decide the period that you’ll be evaluating (month, quarter, year).
Then, you should add up your total customer acquisition expenses for that period, which should include all of your salaries, tools, and other expenses related to marketing and sales.
Last, you divide the previous total by the number of new customers acquired during the period. The result should be your company’s estimated cost of acquiring a customer.
CAC Formula
All of the calculation guidelines above can be summarized with the following formula:
Customer Acquisition = Sales and Marketing / Number of New Customer Acquired
Examples of CAC
Example 1: SaaS Company
Let’s assume a company selling accounting software hires a third-party agency to conduct a marketing campaign, for the first quarter of the year. The total cost of hiring this agency amounts to $5,000.
Additionally, during this quarter, the company spends $3,000 on salaries and equipment for its Sales personnel.
At the end of the campaign, the company discovers that 500 new customers subscribed for their service.
The CAC for this service company for the quarter would be:
| CAC = ($5,000+$3,000) / 400 = $20 per customer. |
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Example 2: A Manufacturing Company
Assume a manufacturing company selling gadgets spends a total of $15,000 on marketing and $17,000 on sales for the month of April. After running their ads and other promotional sponsorships, they acquire a total of 200 new customers.
The company’s CAC would be:
| CAC = ($15,000+$17,000) / 200 = $160 per customer. |
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Example 3: A Real Estate Company
A brand new real estate startup makes the following sales and marketing expenses on their first year of business:
- Salaries for sales and marketing team $60,000
- Business cards $1,000
- Yard signs $900
- Telemarketing $14,000
At the end of the year, they acquired a total of 50 customers.
So, their total CAC for the year would be:
| CAC = ($60,000+$1,000+$900+14,000) / 50 = $1,518 per customer. |
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7 Ways to Lower Customer Acquisition Costs
Here are our 7 top tips you can implement to lower your customer acquisition cost and boost your company’s revenue growth:
#1: Retarget
One of the easiest ways to persuade customers to reconsider your company as well as optimize your CAC is through retargeting.
A retargeting campaign allows you to target specific website visitors with ads in hopes of convincing them to become buying customers. These campaigns are effective because they enable you to display ads only to visitors who have already expressed some form of interest in your product.
To do this, you can leverage tools such as the Google Ads display network or Facebooks ads.
#2: Add Value
There’s a variety of ways through which you can add value for your prospective customers, outside the product or service you’re offering.
You can, for example, establish an online purchasing option so customers can browse your goods regardless of not being available, locally.
Other incentives you can provide include free shipping, fast delivery, responsive customer service, customer feedback and suggestions, easy return policies, and more.
#3: Pay Attention to Visuals
When it comes to converting leads into customers, visual representation matters, as most people won’t buy what they can’t see.
So, make sure to use high-quality photography and outstanding visuals throughout your entire website and social media channels. Try using pictures that best describe your products, instead of random stock images.
Additionally, if you have good reviews, make them visible on your website by positioning them where visitors can easily locate them to help build more trust and credibility for your business.
#4: Automate Marketing
Automation of marketing with Customer Relationship Management (CRM) tools can be a little costly to implement, but the investment pays out in the long run.
CRM software automates repetitive marketing tasks, reducing the administrative burden on your team, decreasing the possibility of error, and speeding up the closure of sales, which results in an overall lower customer acquisition cost.
Now, there are almost infinite choices when it comes to marketing automation software and filtering the best ones can be a challenge. Luckily, though, most platforms offer a free trial you can laverage to test the software in your unique setting and evaluate which is the best fit.
#5: Invest in Content Marketing
In the words of the American business magnate Bill Gates: “content is king.” And there’s a reason for that, which goes beyond simply providing informative articles for your visitors and customers to read.
Content marketing supports your branding efforts, extends your potential market reach, and supports your purchase process, often with little to no monetary investment.
Try to publish intentional, content-driven articles no less than twice a week to your blog to attract the most qualified and engaged customers.
#6: Implement a Referral Program
A referral program is a system that encourages your previous customers and clients to recommend your product or service to family, friends, and co-workers. With this model, a person has a reason to refer you to their network, which could be a freemium, discount, coupon, or service extension.
So, for example, you can offer a 10% discount to the customer who makes the referral and a $10 coupon rate for the referred customer to use on their first purchase.
This method costs your business very little money, increases the lifetime value of your customers, aids retention, and decreases overall CAC.
#7: Add CRO to Your Website
Conversion Rate Optimization (CRO) is the process of optimizing your company website to increase the likelihood that a visitor takes a desired action, such as subscribing to a newsletter, filling out personal information, registering for a webinar, and so forth.
Benefits of implementing CRO include:
- Data-based decision-making
- New areas of opportunity
- Outranking competition
- Risk reduction
- Overall lower cost of acquisition
Frequently Asked Questions
#1: What’s the Difference Between CPA and CAC?
Cost Per Acquisition, or CPA measures the cost of acquiring something that’s not a customer. This could be a registration, activated user, free trial, lead, or prospect. Customer acquisition cost (CAC), contrarily, measures the cost of actually acquiring a customer.
For example, if you sign up for your free month on Spotify, you’re measured using CPA. Once you become a paying customer, you’re measured using CAC.
#2: What Goes Into Customer Acquisition Costs?
Customer acquisition costs include the following categories:
- Salaries or sales and marketing employees.
- Equipment used by sales and marketing employees such as computers, monitors, printers, etc.
- Software applications and other necessary digital tools like Customer Relationship Management (CRM), Analytics and SEO, marketing automation, etc.
- Third-party consultants and agencies used for marketing and advertising needs.
- Event, conference, media, and promotional sponsorships.
- Advertising costs, including telemarketing, online ads, direct mail, catalogs, etc.
#3: What Is a Good CAC for SaaS?
A good CAC ratio depends on another ratio, known as the customer lifetime value (LTV). LTV is a running estimate of the profit a client will bring to your company, over time.
The industry standard for the LTV: CAC ratio for SaaS companies is 3:1. So, if you spend $400 to acquire a customer, you should aim to earn a least $1200 from each of them.
Be careful, though, because a higher ratio (such as 5:1, or 6:1) is not a good sign, as chances are you’re under-investing in marketing and restraining growth.
Key Takeaways
It’s only after you clearly know what it costs to attract and bring in new customers, that you can make well-informed business decisions and predict how profitable your company operations can be in the long run.
Here are some of the key points we’ve covered about calculating customer acquisition costs and how to lower them:
- CAC is important because it measures how much value a customer brings in, gives you insights into the most beneficial segments, and helps investors determine your business’ overall profitability.
- To calculate CAC, you have to add up your total sales and marketing expenses and divide that by the number of new customers acquired.
- Sales and marketing costs usually include employee salaries, sales commissions, advertising costs, paid sponsorships, telemarketing, and web design.
- You can lower your customer acquisition costs by conducting a retargeting campaign, adding value through different incentives, automating marketing with CRM software, and investing in content marketing, among other things.
