What is your customer acquisition cost (CAC)? Customer acquisition cost is how much you spent to gain a single customer during a specific campaign or timeframe. Knowing this figure helps in calculating the ROI of your marketing efforts.
Why does customer acquisition cost matter?
Your CAC is an integral metric for investors and your company. Investors use the figure to gauge your company’s profitability by comparing how much your customers spend on your products and services to how much it costs to win them over.
As a company, CAC is useful because it tracks one customer’s monetary value, shedding light on areas where your business can bring more value to the table and get customers to buy more. Knowing your CAC also shows what parts of your sales and marketing processes are most effective so that you can double down on the channels bringing the most results for the lowest cost.
How do you calculate CAC?
All you need to calculate your CAC is a straightforward formula:
CAC = CSM / CG
CSM is your “Cost of Sales & Marketing,” and CG is your “Number of Customers Gained.” Say you spent a total of $100,000 on your sales and marketing efforts for a campaign that drew in 1,000 new customers. Your CAC would be $1,000 per customer acquired [$100,000 / 1,000 customers = $1,000].
What expenses are related to CAC?
CSM should be the total cost involved in your sales and marketing efforts. It can include expenses in sales and marketing departments for things like:
- Employee salaries
- Software and other tech-related costs
- Overhead costs
- Inventory upkeep for SaaS businesses
- Outsourced services
- Ad spending
- Publishing costs
- Production costs
What’s a good CAC?
You can use your CAC to look at the profitability of a particular marketing campaign or time period. If you see your CAC is too high, it also allows your company to assess how they can lower the CAC to acceptable levels.
Customer acquisition costs vary widely by industry, so a more useful measure to judge where your CAC stands is to compare it to your customer’s lifetime value (LTV). LTV is how much revenue you predict a single customer will bring in over the life of their relationship with you. To find the LTV, you’ll want to multiply three figures:
Average value of a purchase x average number of transactions x length of the relationship = LTV
If the average sale at your company is $200, and customers buy from you four times per year for two years before moving on, then your LTV is $1,600 [$200 x 4 x 2].
In general, your LTV and CAC ratio should be about 3:1. This means that your customer generates three times more value than the cost to acquire them. If your ratio is 5:1, then you may actually be spending too little on gaining new customers and losing business opportunities. If it’s 1:1, then you’re only breaking even between what you and your customers are spending.
3 ways to lower your CAC
If your CAC is coming out too high, some of the best ways to lower it are:
- Boost your website conversion rates. Better sales copy, landing pages, calls-to-action, and mobile experiences can optimize your customer acquisition efforts while also getting customers to spend more.
- Raise the value of current clients. Introducing new products, services, upgrades, packages can increase your customer’s lifetime value.
- Improve your content marketing. Online content is a marketing powerhouse that can live on indefinitely. Effective content establishes you as an authority in your industry and as a helpful resource for your target audience while simultaneously organically growing your reach. Content CAC ratios are as much as 30 percent better than paid CAC.