Customer Acquisition Cost (CAC)
The total amount of capital required to gain a new customer.
How to calculate customer acquisition cost
CAC = (Total marketing spend + total sales spend on customer acquisition) / (total new customers)
You’ll always calculate CAC over a specific period of time, which may change based on your industry and your business’s needs. A good place to start is using a rolling 30 day period or the current quarter to calculate your spend and new customers.
How much are you spending to get a customer?
Customer Acquisition Cost (CAC) lets you see, over a period of time, how much you are spending to acquire customers. After adding your sales and marketing costs for a time frame, you add up the number of customers you acquired over that period and divide the costs by the total number of customers. Generally, CAC is calculated for a rolling month or per quarter.
Because CAC is one type of a “health score” for your company, the lower your CAC is, the better. Lowering your CAC is indicative of a couple main things: first, that your customers are generating enough revenue to help cover your company’s expenses; and second, that you are capitalizing on the most effective channels for acquiring customers. A low CAC is an indicator that more leads are converting at a lower cost and/or delivering more lifetime value to your business.
Why does Customer Acquisition Cost matter?
Customer Acquisition Cost helps you see the monetary health of your company. Are you spending more to obtain a customer than you’ll receive over the lifetime of that customer?
Your company’s CAC goes hand-in-hand with the lifetime value (LTV) of your customers. LTV measures the approximate gross profit that a customer will produce during their “lifetime” with the company. If you are spending more on gaining customers than they will produce in revenue for your company, at some point the money will run out. This is a huge danger for startups, according to David Skok.
CAC is also important because you want to make sure you’re spending your money towards the most profitable efforts in gaining customers. There are many ways to look at your CAC, depending on your role in the company and your focus. One practical way to measure CAC is to divide it up by channel: how much you’re spending towards each of your marketing channels.
What to watch out for
Ratio of LTV to CAC and payback. Generally, the LTV to CAC ratio for SaaS companies should be about 3:1. Additionally, you’ll want to aim to recover your CAC in around 12 months. (This is your payback rate---how long it takes a customer to “pay back” the money it took to acquire them.) If you go much longer than this, your business will require a lot more capital in order to grow.
What to include in marketing and sales costs. You may be tempted to leave out employee salaries, but that’s actually something you’d want to include. Other things you should consider in calculating your CAC include overhead (rent and equipment) for employees in marketing and sales and the cost of tools these employees use use to operate.
New vs. returning customers. Andrew Chen suggests separating the two, as most companies have marketing and sales efforts towards gaining new customers and different marketing and sales strategies in retaining or regaining old customers.
Customer Acquisition Cost Example
In one month, Company Awesome spends $1,000 on marketing campaigns. Operational costs for marketing and sales for that month total up to $500, and the total sales costs are another $1,000. Add those numbers up:
$1000 + $500 + $1000 = $2500
This is the total amount Company Awesome spent.
Over this month, Company Awesome acquired 100 new customers. To calculate Company Awesome’s customer acquisition cost, divide the total spend by the number of customers:
2500/100 = $25
So the customer acquisition cost of Company Awesome is $25 for that month.
How to influence Customer Acquisition Cost
CAC is calculated based on four general stages, which vary depending on your type of organization:
- Demand gen
- Lead gen
- Sales conversions
A lot of influencing your CAC starts at the first level. Demand gen and lead gen is where you focus a lot of your marketing efforts. You may consider looking at you CAC by channel, which tells you where most of your customers are coming from. You can then determine which platforms are more profitable and which others you should invest less money in.
Customer Acquisition Cost for eCommerce
- CAC for eCommerce looks a little different from CAC for SaaS. B2C companies by nature will focus on the first and last “stages” described above: demand gen (inbound traffic, website visitors) and sales (number of sales and their value).
Customer Acquisition Cost for SaaS
- The SaaS-focused CAC metric takes into account both the sales costs as well as the marketing costs to acquire a customer.
- For SaaS, the equation looks like this: (Total Sales costs + Total Marketing Costs) / (number of new customers over the same period)
Customer Acquisition Cost for Startups
- For startups, calculating CAC is important but it can also be deadly to your startup. In an ideal world, people would naturally be attracted to your product because it fulfills one of their needs. While you definitely need to start accruing revenue, you also need to be sure that you are monetizing those customers. (This is the LTV of your customers.)
- David Skok and Jared Sleeper suggest waiting to calculate CAC until you have a scalable business model. This is because the channels your early leads come through may not scale indefinitely; rather, as startups grow, they often need to add more expensive channels to gain leads.
Customer Acquisition Cost for Marketing Agencies
- For marketing agencies, you’ll likely take more factors into account when calculating your customer acquisition cost, such as cost per click (CPC) and how much it takes to generate new leads for your company.
Add a Customer Acquisition Cost metric tile to your dashboard!
Who drives Customer Acquisition Cost. VP of Marketing and VP of Sales.
Customer Acquisition Cost chart type(s).
- Line Chart
- Column & Line Chart
- Bar & Line Chart
- Stacked Column Chart
Measure. Percentage of visitors by traffic source
- 30 days (rolling)
- Quarter-to-date (QTD)
Display interval. Month
- Net CAC
- CAC MTD
- Average CAC Rolling Year
- Net CAC Previous Year
- CAC Previous Month
- Average CAC Previous Rolling Year
Data Source(s) for tracking Customer Acquisition Cost
- Google Analytics
Questions about Customer Acquisition Cost? Chat in on the site and we'll be happy to help.