Customer Acquisition Cost: What Is CAC & How to Calculate Formula (Definition, Benchmarks)

on Blog June 30th, 2020

You don’t have to be a knowledgeable marketer to know that the main goal of any marketing plan is to consistently acquire new customers.

That being said, there are many different ways you can attract potential clients to your business – and some are much more cost-effective than others.

Take digital marketing and traditional advertising, for example.

Traditional advertising channels like radio, television, and billboards still have their place, but solely relying on these to increase your customer base may not produce the results you want.

Furthermore, it’s impossible to accurately calculate the cost of acquiring each customer with this promotion strategy, so you’ll never know how effective your strategy actually is or what tweaks you need to make to improve its performance.

Digital marketing & internet marketing, on the other hand, allows you to monitor, measure, and adjust your promotion efforts based on how well they’re performing.

The best part is that you can track every single aspect of your campaign, so you’ll be able to determine your customer acquisition costs and ensure that you’re getting the most out of your promotion spend.

Taking all of this into consideration, calculating your customer acquisition cost (CAC) may be confusing for first-time business owners or traditional marketers.

At Fannit, we’ve spent the best part of the last decade setting up predictable strategies and helping our customers calculate their CAC as well as other crucial metrics. Our team understands the different factors and nuances that affect CAC, so we can monitor and help control your customer acquisition cost without disturbing other parts of your operation.

Below, we’ll go over the definition of customer acquisition cost, discuss some of its advantages, and give you tips on lowering this crucial metric.

What is Customer Acquisition Cost? (Definition)

In simple terms, customer acquisition is the process of finding new leads and transforming these potential customers into paying clients.

However, the chances of having a consistent volume of customers calling for a quote or walking through the door is not very high without a good promotion strategy, so you’ll need to invest part of your resources into developing a successful promotion campaign.

In this context, the customer acquisition cost represents the monetary investment you have to make to get each one of your clients. Also known as C.A.C. or C-A-C, this technique can help you build a predictable marketing plan and set realistic goals based on your promotion budget.

Furthermore, your average customer acquisition cost can be determined through a mathematical formula that takes two main factors into account: the number of new customers you attract and the amount of money you invested to get these clients.

Sales and Marketing Costs

Your sales and marketing expenses have to be included in the customer acquisition cost formula, as well as any other investments you make to attract new clients. With this in mind, it’s important to note that, traditionally, customer acquisition cost calculations only include efforts to attract new leads, rather than upselling or cross-selling to existing clients.

Companies can also develop separate formulas for new customer acquisition cost and recurring customer acquisition costs according to their needs. In these cases, it’s best to have the help of an agency that can take your businesses’ specific requirements into consideration when determining your sales and marketing expenses.

For instance, if you want to calculate the CAC of a specific online channel or geographical location, it may be difficult to determine what expenses to include in your formula. By working with an experienced team, you’ll be able to find quick solutions for these scenarios and accurately determine specific CAC values whenever necessary.

Number of Customers Acquired

The second element of your calculations is the number of new customers acquired as a result of your promotion investment. As with sales and marketing costs, some companies only include new client acquisitions while others prefer to include existing customer upgrades and add-ons to get a more holistic view of their financial standings.

Businesses that offer recurring services often have predetermined billing cycles, so they need to make the proper adjustments when calculating CAC. It’s important to modify the formula to account for churn, customers who are pausing payments temporarily, and other common scenarios that SaaS companies and similar organizations usually face.

There is no silver-bullet solution to determine SaaS customer acquisition cost, so you’ll need to look at your requirements and find an approach that gives you actionable information to help improve your campaign.

A Quick Note on Customer Lifetime Value (LTV)

While a lot of attention goes to the cost of customer acquisition, it’s important to understand that focusing only on CAC may give you a skewed view of your company’s marketing performance. CAC is important, but you also need to consider your customer lifetime value, which is known as LTV, to guarantee a sustainable business model.

Your customers’ LTV represents the amount of revenue you can potentially make from these clients throughout the duration of their lifetime as a paying customer.

Let’s go over a simple example to illustrate LTV. When a car dealer sells a vehicle to a new customer, this client now has the potential to come back and make other purchases for as long as he or she is allowed to drive.

But, the price of the vehicle and overall experience will help the customer decide if he or she wants to return to the same dealership for future purchases, so you need to deliver excellent service for customers to live up to their LTV potential.

If CAC costs are high and LTV is low, it will be impossible for your company to generate a profit. In an ideal scenario, the CAC per customer would be relatively low while the LTV would be on the higher end of the scale.

Unfortunately, it’s common to see cases where sales and marketing expenses are reduced to improve CAC, just to yield a low return in terms of LTV. This is because budget sales and marketing strategies tend to provide low-quality leads that have a lower lifetime value due to a variety of reasons.

The solution here is to find a strategy that keeps CAC low while ensuring that you attract quality customers with a good LTV duration.

Advantages of Accurately Measuring CAC in Your Company

Learning how to accurately calculate customer acquisition cost can help your business in different areas. The most obvious advantage is that you’ll know exactly how much money it takes to get a new customer, so you’ll be able to make plans according to your budget.

Accurately calculating CAC costs can also help:

Lower CAC While Improving Other Parts of Your Business

By learning how to calculate CAC accurately, you’ll see how much you’re spending on getting each customer and what parts of your acquisition investment are the most effective.

Getting new customers is usually the most challenging part of running a company and most managers lower the quality of their service to relieve financial pressure. The goods news is that CAC can help you dissect your entire marketing campaign. By calculating the CAC of each channel separately, you’ll be able to focus on the sources that produce the best leads.

This strategy works perfectly with inbound marketing, SEO, and other forms of online marketing because you can see what clients are coming from which channels and calculate CAC individually. If the most expensive channels are not the ones generating the largest volume of new clients, you can start making the necessary adjustments to lower your CAC without affecting LTV or compromising the quality of your goods and services.

Build a Predictable Revenue-Generating Machine

Getting customers is important, but companies also need to ensure a steady stream of sales to be successful. This is the reason why many organizations look to achieve a state of predictability. Decision-makers are often in charge of transforming marketing from a large expense into a predictable source of profit, which has the ability to drive sustained growth over extended periods of time.

CAC is imperative for predictability because it tells business owners how much money each customer costs. With this information, you can calculate the amount of money you need to produce a certain number of leads, generating opportunities for your sales team. A predictable scheme still needs to be monitored and optimized, but it will help you reach monthly, quarterly, and yearly revenue goals.

One of the keys to developing a predictable sales machine is identifying the most cost-effective ways to get customers. B2C companies that focus only on PPC may produce a large number of sales, but scaling paid campaigns is always a challenge. B2B companies, on the other hand, often rely on purchased email lists that are sent to the sales team. The problem is, finding quality lists to quench the thirst of an expanding sales department only gets harder and harder.

The solution to both of the scenarios described above is predictability, which can only be achieved with accurate CAC and LTV calculations.

Track and Optimize CAC on a Regular Basis

The cost of customer acquisition does not remain the same. As a matter of fact, it can vary greatly depending on the time of year and other factors. By keeping a close eye on the cost of acquiring new customers, you’ll be able to track the different changes and optimize your promotion efforts on a regular basis.

Monitoring CAC can help you identify the best times of the year to market your products in terms of cost per new customer. Seasonal trends are well-known within every industry, so you’ll likely face stiff competitions when promoting during these times. CAC can help you identify small gaps and take advantage of them in order to get new customers at a much lower cost.

Developing a consistent process to optimize your CAC is the best way to use your data. The first step is to identify the key performance indicators (KPIs), which are actionable metrics that show the real performance of your campaign. These can include the individual CAC performance of each marketing channel as well as metrics related to LTV.

If the optimization process is inconsistent, you’ll find it difficult to accurately determine the number of customers acquired and at what cost. CAC optimization also requires ongoing testing and tracking to ensure that you get new customers at the lowest possible price.

How to Calculate Customer Acquisition Costs (Industry Averages, Benchmarks)

CAC is often calculated for a specific time frame, so you’ll want to determine if you want to evaluate performance during a month, quarter, or entire year. Once you determine the time frame, you can extract the data you’re working with.

You’ll need to figure out the amount of money you spent during the time frame you want to analyze and how many new customers you got as a result. To calculate your spendings, add up your marketing and sales expenses. Then, divide this value by the number of new customers generated during this period and voila, you have your customer acquisition cost. CAC calculations can be adjusted depending on the channel and location you want to analyze, but they usually follow the same formula.

Let’s use an example to illustrate CAC calculations.

Company A spent $1000 on marketing and $500 on sales last month, which produced 15 new clients. In this case, the CAC formula would look like this:

($1000 + $500) / 15 = $100

So, the CAC per customer during this time period is $100.

Marketing Channels CAC

As we mentioned briefly before, the CAC formula can be applied to specific marketing channels to determine how cost-effective they are. The concept remains the same, but you have to remember to include both marketing and sales expenses from the channel you’re examining.

The good news is that each online promotion channel has its own set of statistics, so you can quickly collect the information you need for CAC. That said, calculating CAC for SEO and other online promotion strategies may pose more of a challenge because these can help you acquire a customer through a variety of different channels.

It’s important to note that calculating CAC is not enough to create a predictable model that promotes sustained growth. You have to learn how to leverage this information and compare it against other KPIs to reveal valuable information about the success of your current setup.

Calculating LTV (Customer Lifetime Value)

One of the most important KPIs you have to use along CAC is LTV. By determining how much money you can potentially make from a customer throughout the duration of your relationship, you can find the ideal CAC value to keep your business profitable.

But, calculating LTV is not as easy as CAC. Instead of focusing on how much it costs to acquire a customer, LTV looks at areas like:

  • Average Purchase Value: To calculate the average purchase value, you should choose a specific time period you want to analyze, for example, a year. Then, take the entire revenue and divide it by the number of sales made during this period. The result should be the average purchase value.
  • Average Purchase Frequency: To determine the average purchase frequency, you should divide the number of sales you made by the number of unique customers in that specific time period.
  • Customer Value: Customer value is calculated by multiplying the average purchase value and the average purchase frequency.
  • Average Customer Lifespan: Finally, you should look at your archives and calculate the average number of months or years a customer keeps buying products or services from your business.

Once you have the information above, you’ll be able to determine LTV. Simply multiply the customer value by the average lifespan and you’ll get a good idea of how much revenue you can expect to make from each new customer, as long as you play your cards right.

Lowering CAC and Improving the Performance of Your Marketing Strategy

For many marketers, the main goal is to lower their company’s customer acquisition cost. CAC can be lowered through a variety of means, but many of these have the potential of reducing the quality of your services or the number of sales you generate.

Instead, you should find ways to lower the cost of acquiring customers while improving the efficacy of your promotion efforts.

Some of the steps you can take to keep CAC low and improve the performance of your promotion strategy include:

Optimize the Sales Funnel

Your sales funnel is a visual representation of where your customers are during their decision-making processes.

Leads closer to the top of the funnel are learning about your services and slowly getting ready to contact your sales department. Potential customers that are closer to the end of the sales funnel are well aware of your business and the value you provide, so they’re very close to becoming.

However, these are just the two extremes. Customers go through a variety of different stages before making a purchase decision and you can take advantage of this by reaching out and delivering specific messages that prompt leads to move closer to the bottom of the funnel. For instance, you can optimize your funnel by creating a sequence of emails that nurture leads and gently usher them in the direction of a purchase.

Revamp Your Pricing and Payment Schemes

Instead of increasing prices and hoping this will lower acquisition expenses, you should evaluate your entire pricing scheme with both CAC and LTV in mind. Depending on your industry and the quality of your sales team, you may be able to charge for installation and other initial fees without marketing your product at a higher price. Not only this, but you may also be able to charge for monthly subscriptions if you’re granting your clients access to valuable resources.

Likewise, you may want to examine your outgoing payments and potentially explore the idea of restructuring your payback scheme. If you can work with your providers to make smaller upfront payments or reduce monthly expenses, you’ll have more time to get back the money spent to get a new customer.

Make Conversion-Oriented Site Improvements

Out of all the promotion channels you have available, your website may be the most cost-effective one of them all. The main problem is that getting visitors to your website is not easy. Even if you manage to get enough users to go on your site, lead generation only occurs if you have features that increase your chances of getting conversions.

This is the reason why inbound marketing and SEO work extremely well for companies focusing on CAC and LTV. Inbound marketing and SEO are customer-centric approaches that aim to create a growth-driven site, which should include CTAs, contact forms, and other elements that increase your chances of getting new leads.

Focus on Producing a Pleasant Experience for Customers

In the perfect scenario, creating a solid promotion strategy is enough to attract clients. But, there are many factors that influence your customers’ decisions, including the experience they have whenever reaching out to your company.

Whether it’s through a website, in-person, or over the phone, businesses need to focus on creating a pleasant customer experience to keep CAC costs low. Imagine someone walking into a store that has everything the person needs, but it’s a complete mess. Potential customers may take the time to sort through everything, but in most cases, they will likely leave and come back another day or go over to a competitor instead.

The scenario above is easy to understand but the concept applies to complex cases as well, like when a customer visits a business website that’s not working or receives bad service from a company over the phone.

Implement a CRM (If You Don’t Have One Already)

A customer relations management (CRM) system is designed to simplify communications with your clients while giving your team all the pieces of information they need through one platform. CRMs are very powerful tools that can help you track every contact with each lead so that your team always has updated information, even if it’s a different representative handling the sale.

There are dozens of great CRMs out there, some of which can be used for email marketing, social media management, and marketing analysis, but you need to find an option that has all the features your company needs.

Bolster Your Marketing and Sales Efforts with Inbound Marketing

We’ve said it a few times and we’ll say it again, inbound marketing and CAC calculations work extremely well together.

Besides the fact that you can track all expenses, sales, and acquisitions, inbound also focuses on every customer-facing part of your strategy, including website, social media, and all other potential areas. Prioritizing these areas can dramatically increase the number of leads you get online while still keeping your expenses relatively low.

Work on Achieving a Good LTV to CAC Ratio

As a general rule of thumb, you’ll want to have an LTV to CAC ratio of at least 3 to 1. In other words, your LTV should be at least three times the value of your CAC, so for every $1 you invest, you’ll make $3 in return.

Contact Fannit Today and Learn More About Calculating CAC for Your Business

Our team of SEO and inbound experts has decades of combined experience helping customers calculate CAC and achieve optimal LTV ratios. We have learned first-hand about the different variables that should be included in your different CAC calculations, so we can help you develop tailored formulas to accurately assess your company’s current acquisition expenses.

If you’re interested in learning more about working with our team, contact us today and we’ll be glad to help.