Customer acquisition cost (CAC) Meaning
Customer acquisition cost (CAC) is the average amount a business spends to gain a new customer. It defines the money businesses spend on average on different campaigns to sell a product.
To calculate the CAC for a given timeframe:
Cost of Marketing + Cost of Sales
CAC = ———————————————
New Customers Acquired
Understanding what CAC is crucial in ensuring the business does not spend more than they need to on marketing when compared to the cost of the product it’s selling. It can also allow businesses to increase their profit margins — the higher your CAC, the thinner your profit margin and ROI.
The CAC can be calculated across all marketing spend or on specific campaigns. It can show which marketing campaigns are effective and have the highest return on investment (ROI). That way, the business can allocate more spending on the most effective channels.
For the CAC to be informative and accurate, it should encompass all expenses that go into product promotion. That would usually include:
- Advertising spend.
- Staffing costs.
- Cost of content creation and publishing.
- Technical costs on tools needed to run the marketing campaign. These include software purchases and maintenance.
A business can lower its CAC and maximize ROI by:
- Demonstrating clear value in marketing messaging.
- Track advertising performance metrics by channel and focus money on the channel with the highest return.
- Increasing customer engagement.
- Eliminate unnecessary internal costs in the sales process.
- Encourage customer referrals to reduce your acquisition costs.
There is no one figure for CAC that’s ideal for all businesses. It will usually depend on the industry, the age of the business and the customer lifetime.