Customer acquisition cost (CAC) is a measure of how much it costs your business to acquire a single new customer. Marketing expenses are considered to be the main cost component when a business is seeking new customers. CAC is the opposite of churn rate.
Customer Acquisition Cost Formula:
Customer Acquisition Cost = Total marketing expenses / Total customers acquired
How to Calculate Customer Acquisition Cost:
1. Define a time period.
First, you need to define a time period during which you spent money to acquire new customers. For example, perhaps you spent $20,000 on marketing in your first year of business.
2. Divide by the number of customers acquired in the same time period.
Carrying on with the example above, divide the total amount that you spent on marketing in one year ($20,000) by the number of customers that you acquired in that same time period. For the sake of this example, we'll say that you acquired 500 customers in your first year. $20,000/500 customers = $40 per customer.
3. The result is your customer acquisition cost.
As you can see from the math above, your customer acquisition cost was $40. In other words, it cost your business $40 for every new customer that was acquired in the first year.
Why Customer Acquisition Cost Matters:
Some business owners may wonder why it is important to calculate their customer acquisition cost, or what CAC will tell them about the state of their business. The reality is that your CAC can indicate if your sales and marketing teams are being effective and if you are really securing a strong profit through the sale of your goods or services.
A business that has $100,000 in sales over the course of six months may sound like it is profitable, but there may be other factors. For example, if you spent $60,000 on marketing in that same period of time and only acquired 100 customers, you have an extremely high customer acquisition cost of $600. With a high CAC like this, it will be difficult for you to maintain a good CAC ratio and earn a reasonable profit.
On the other hand, if you only spent $30,000 on marketing in six months, but managed to acquire 300 new customers, you have a much lower CAC of just $100 per customer, meaning that your overall profits will be much greater.
How do you calculate customer acquisition cost?
To find you customer acquisition cost, simply divide your marketing expenses by the number of customers acquired in the same period.
What is a good CAC ratio?
As a general rule, a good CAC ratio is 3:1, meaning that the value of each customer that you acquire should be three times what it cost you to acquire them.
Does customer acquisition cost include cost of goods sold?
Some businesses include the cost of supplies and labor in the CAC calculations, but most do not. Generally, marketing expenses are the most significant variable.
Why is customer acquisition so important?
Businesses only grow by acquiring more customers, so a focused effort on customer acquisition is critical to sustained success. Your revenue will not increase without steady customer acquisition.
What does customer acquisition mean?
An "acquired" customer is a paying customer who uses your products/services as a result of your marketing efforts. Sometimes these customers have switched to your business after paying for goods or services from one of your competitors.
How can we reduce the cost of customer acquisition?
- Automate your marketing campaigns.
- Incentivize existing customers to invite their friends.
- Improve your conversion rates.
- Focus on your target market.
- Create helpful content.
What is included in acquisition cost?
Your customer acquisition cost may include marketing expenses and sales expenses, including the salaries that you pay to employees in your marketing and sales departments.
How much more expensive is it to acquire a new customer?
When compared to retaining an existing customer, it is estimated that customer acquisition costs at least five times as much. For this reason, your business should make customer retention a priority.
Does CAC include salaries?
Businesses often include marketing and sales salaries in their CAC calculations because new customers could not be acquired without the efforts of your sales and marketing employees.