What is Customer Acquisition Cost (CAC)?

Your Customer Acquisition Cost or CAC is the total amount you spend to gain a new paying customer. In other words, it is how much your business spends to convince a consumer to buy your product or service.

CAC includes all the costs associated with advertising, marketing, and sales.

For any business to survive and thrive, it must have customers. Knowing how much it costs to expand your customer base is important – it helps you determine how profitable your company is. It helps you measure the ROI (return on investment) of efforts to expand your clientele or customer base.

Businesses commonly use CAC alongside the Customer Lifetime Value (LTV) to measure the value that a new customer generates. LTV is the total revenue expected from a customer over the entire business relationship.

The Cambridge Dictionary has the following definition of “customer acquisition cost” and an example sentence containing the term:

“The average amount a company spends to get each new customer, for example, by advertising. Example Sentence: ‘Strategic partnerships can bring new customers, reducing customer acquisition costs.'”

The term has been around for a long time; however, it became more popular and prominently defined with the rise of online marketing and analytics. Calculating customer acquisition costs today is much easier and more precise than before the advent of the Internet and e-commerce.

CAC – the basics

As previously mentioned, customer acquisition cost is the total amount of money you spend to get somebody to purchase your product or service. This includes the following costs:

Online ads (social media, search engines, display networks), print materials (flyers, posters, brochures), sponsorships (events, influencers, community programs), radio and television commercials, direct mail campaigns, billboards and outdoor advertising, and trade show participations.

  • Sales Team

Salaries for sales staff, commissions based on sales targets, bonuses for exceptional performance, training and development costs, travel and accommodation expenses for sales trips, customer relationship management (CRM) software subscriptions, and networking event fees.

Many images representing customers, graphs, expenditure, sales, marketing, and a definition of Customer Acquisition Cost.
Image created by Market Business News.
  • Marketing Resources

Software tools (email marketing platforms, SEO tools, analytics software), content creation (blog posts, articles, videos, podcasts), website design and maintenance, Search Engine Optimization (SEO) and Search Engine Marketing (SEM) services, social media management and campaigns, public relations and media outreach, market research, and consumer analysis.

  • Partnerships and Affiliates

Payments to affiliate partners, maintaining partnerships, affiliate network fees, and third-party commissions for referring new customers or prospects.

Customer acquisition cost – benefits

Knowing your CAC is good for business—many would say it is essential, for the following reasons:

  • Profitability

If your company spends more to gain a new customer than the revenue they bring in, it is running at a loss. It will not survive. CAC helps you determine whether your expenditure is worth it.

  • Budgeting

Without CAC, it is very difficult to allocate marketing and sales resources effectively.

  • Scaling Up

If your CAC shows that it costs too much to acquire a new customer, growing your business rapidly might not be sustainable.

  • Strategic Decision Making

Understanding your CAC can help you make strategic decisions across your business, influencing product pricing, target markets, and promotional strategies.

How to calculate customer acquisition costs

Follow these steps:

  1. Choose a specific period

Decide whether you want to track CAC monthly, quarterly, or annually.

  1. Gather your costs

Add up all marketing and sales expenses for that period.

  1. Count the customers

How many new customers did you gain during that period?

  1. Do the Math

Divide your total costs (step 2) by the number of new customers your company gained (step 3).

An example

  • Let’s say you want to calculate annually.
  • Over one year, your marketing and sales expenses totaled $250,000.
  • You gained 250 new customers.
  • $250,000 divided by 250 equals $1,000. Therefore, your CAC is $1,000.
Image showing a Customer Acquisition Cost calculation.
Image created by Market Business News.

Lowering your CAC

How can you lower your customer acquisition cost? In other words, how can you become more efficient at bringing in new customers? Here are some tips:

  • Target the Right Audience

If your marketing is laser-focused, you will waste less time and money on consumers who are unlikely to buy.

  • Optimize Your Processes

Analyze your sales funnel for bottlenecks, inefficiencies, or pain points and address them.

Turning potential customers into paying ones takes time and effort.

  • Leverage Automation and Technology

Smart automation (with artificial intelligence) can organize and streamline your marketing efforts. It can enhance email marketing, social media posts, and customer segmentation, reducing manual labor and increasing efficiency. Apart from helping you target potential customers more effectively, automation can also save you a lot of money.

Final thoughts

CAC is a vital metric for businesses of all sizes. By tracking your customer acquisition cost, you can determine whether your current spending is paying off.

The goal is to lower your CAC over time while maintaining, or even increasing, the number of new customers you gain.

The world’s most successful companies take CAC seriously. Do not underestimate its importance for the future success of your company.