What is it?
Customer Acquisition Cost (CAC) or Cost Per Customer refers to the total amount of money a company spends to acquire a new customer.
It includes all marketing, sales, and advertising expenses that are required to attract and convert a potential customer into an actual paying customer. CAC is a critical metric for businesses, particularly those in growth or scaling phases, as it provides insight into the efficiency and effectiveness of their customer acquisition strategies.
Why is it Important?
Understanding CAC is essential for assessing the profitability and sustainability of a business. If a company is spending too much on acquiring customers relative to the revenue those customers generate, it could indicate inefficiencies in the sales and marketing process.
A high CAC can erode profit margins and make it difficult to achieve long-term growth. On the other hand, a low CAC can signal a strong, cost-effective customer acquisition strategy, potentially contributing to higher profitability and scalability.
In addition, comparing CAC to the Lifetime Value (LTV) of a customer can help businesses gauge the overall return on investment (ROI) of their customer acquisition efforts. Ideally, businesses aim to have a CAC that is significantly lower than the LTV, ensuring that they earn more from each customer over time than it costs to acquire them.
How to Calculate it
To calculate CAC, you need to sum up all the costs associated with acquiring customers over a given period, and then divide that by the number of customers acquired during the same period. The formula looks like this:
𝐶𝐴𝐶 = 𝑀𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝑎𝑛𝑑 𝑆𝑎𝑙𝑒𝑠 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑑CAC = Marketing and Sales ExpensesNumber of Customers Acquired
For example, if a company spends £100,000 on marketing and sales efforts in a quarter and acquires 500 new customers during that period, the CAC would be:
𝐶𝐴𝐶 = 100,000500 = 200CAC = 100,000500 = 200
This means the company spent £200 to acquire each new customer.
Some will include all relevant expenses in the calculation, such as salaries for sales and marketing staff as well as ad spend to calculate their figures, whereas a more common form is simply comparing those new customers to total ad spend.
How The Data Refinery Calculates CAC
The Data Refinery connects to most eCommerce and Marketing platforms and connects you data from across the business. By linking data across systems, we can give you a truer version of CAC and other marketing KPIs that link to your P&L, so you can trust in your reporting.
