Customer acquisition cost (CAC) is the total cost to acquire a customer, and lowering it can lead to greater sales margins. When you run a small business, every sale feels like a win. But how do you determine how much you actually made from that sale? There is a simple formula used to calculate this, and it is called customer acquisition cost (CAC).

Learn what customer acquisition cost is, why it matters, and how to calculate it. Learn how to use this calculation to determine overall profitability, and get advice on reducing your CAC if it’s not where you want it to be.

What is Customer Acquisition Cost (CAC)?

Customer acquisition cost (CAC) is the total cost to acquire a customer. It includes all spending on sales, marketing, or other activities related to converting a prospect into a paying customer.

CAC tells you how effective your conversion efforts are and helps you identify opportunities to make them more effective. Calculating your CAC can help you identify bottlenecks and inefficiencies in your sales funnel.

How to Calculate Customer Acquisition Cost (CAC)

To calculate CAC, add up all the costs associated with acquiring a new customer over a specific time period, then divide by the number of new customers who made a purchase during that time period.

The important thing to note here is that the number of new customers acquired only refers to first-time customers, and does not include returning or retained customers. This distinction ensures that the CAC calculation accurately reflects the cost of acquiring new customers, not the cost associated with retaining existing customers.

Costs to include in total marketing expenditures

When calculating your total marketing spend, it’s important to consider all relevant costs to accurately determine your CAC (customer acquisition cost). Here are some key cost items to include:

• Marketing Software & Tools : Subscriptions to essential tools like customer relationship management (CRM) systems, analytics platforms, and email marketing services.

• Marketing Staff Salaries : Salaries, benefits, and compensation for freelance or contract work for your marketing team.

• Advertising costs : Costs associated with online and offline advertising, such as cost-per-click (PPC) campaigns, social media advertising, and traditional media buying costs.

• Offer Discounts and Promotions : The value of discount codes, coupons, and special offers used to attract new customers.

• Content production costs : Costs associated with creating marketing content such as blog posts, videos, infographics, and other materials.

• Selling Costs : Additional costs associated with the selling process that support your marketing efforts.

Tom Jauncey, co-founder of Nautilus Marketing, tracks his CAC closely. He allocates 40% of his budget to advertising, 30% to payroll, 15% to software, 10% to content creation, and 5% to sales costs. This detailed tracking ensures that each element of his marketing budget is optimized for maximum efficiency and effectiveness.

Metrics that can be used with CAC

• Customer Lifetime Value
• Gross profit margin
• Revenue vs. advertising spend
• Sales Efficiency

While customer acquisition cost (CAC) is a useful metric on its own, when used in conjunction with other key metrics, it can provide deeper insight into the health of your business. Here’s how to use CAC in conjunction with additional metrics:

Customer Lifetime Value (CLV)

Customer Lifetime Value (CLTV or CLV) and CAC ratio are important metrics to understand how profitable your customer acquisition efforts are in the long run. CLV represents the total revenue a customer can expect to earn throughout their relationship with your business. By comparing CLV and CAC, you can see whether the cost of acquiring a customer is justified by the revenue it generates.

To calculate CLV, multiply the average revenue per customer by the average customer lifetime. Then divide that by CAC to get the CLV to CAC ratio. Here’s the formula:

If your ratio is between 3:1 and 5:1, your customer acquisition strategy is working effectively. A ratio above this range indicates that your spending is under control but you may not be investing enough in growth opportunities. Conversely, a ratio below the optimal range suggests that you need to increase your CLV or decrease your CAC. Maintaining an optimal CLV to CAC ratio will help you maximize your return on your marketing investment and drive sustainable growth for your business.

Gross Margin

CLV tells you how much revenue you can make from an average customer, but it doesn’t tell you how much profit you actually make per customer. To figure that out, you need to multiply CLV by gross margin. Gross margin is the percentage of revenue you have left after deducting the cost of goods sold (COGS) from your sales.

For example, if your gross margin is 40% and your CLV is $300, then multiplying the two values ​​gives you a profit of $120 per customer. If this profit is less than your CAC, it means that the cost of acquiring a customer is greater than the profit you are receiving over time. In this case, you need to reevaluate your customer acquisition strategy.

Return on Ad Spend (ROAS)

Return on Ad Spend (ROAS) is a metric that measures the revenue generated relative to the amount of money spent on advertising. It is an important metric for understanding how effective your marketing efforts are and whether your spending is generating a good return.

To calculate ROAS, divide the revenue attributed to your advertising activity by your total advertising spend. Here’s the formula:

ROAS = Revenue from advertising / Total advertising spend x 100

By comparing ROAS and CAC, you can determine if your marketing efforts are cost-effective. If your CAC is high and your ROAS is low, it means you are spending a lot of money to acquire customers but are not getting a proportional return, suggesting that you need to optimize your strategy.

For example, if your company spent $10,000 on advertising last month and earned $50,000 from those ads, your ROAS would be calculated as follows:

ROAS = (50,000 / 10,000) x 100 = 500%

This means that for every dollar spent on advertising, the company earned $5 in revenue. This high ROAS indicates that the advertising campaign is very effective and is generating a significant return on investment.

Sales Efficiency

Sales effectiveness is a measure of how effectively your sales team converts leads into paying customers. It is an important metric for assessing how productive your sales efforts are. To calculate sales effectiveness, divide the revenue generated by your sales team by the total sales and marketing costs.

High sales efficiency indicates that your marketing process is generating good returns. For example, if your CAC per customer is $150 and your sales efficiency ratio is 2:1, then you are generating $300 in revenue per customer, which means your investment is worth it. If your sales efficiency is low, then your CAC may be too high compared to the revenue generated, and you may need to optimize your sales approach.

3 Tips to Reduce Your CAC (Customer Acquisition Cost)

1. Improve your site's SEO
2. Identifying the most effective marketing channels
3. Focus on customer segments that can increase customer value

If your customer acquisition costs are higher than expected, you can reduce them by taking the following steps:

1. Improve your site's SEO

Renaissance Digital Marketing focused on search engine optimization (SEO) to improve CAC. They bolstered SEO by optimizing content, improving technical SEO, and building backlinks. “As a result, we saw a 45% increase in organic traffic within six months,” says Doug Darroch, managing director. “This directly contributed to a 30% decrease in CAC, thanks to organic leads being more cost-effective than paid acquisition channels.”

2. Identifying the most effective marketing channels

Digital marketing agency Nautilus Marketing conducted a comprehensive review and optimization of the digital marketing strategy. The team analyzed the performance of various marketing channels to identify the most cost-effective options. By reallocating budgets to high-performing digital advertising, they maximized reach and engagement.

At the same time, they reduced spending on less effective channels and reallocated resources from strategies that weren’t generating satisfactory returns. “By implementing these changes, we were able to reduce our CAC by 15% in about six months,” says Tom Jauncey, Co-CEO of Nautilus Marketing. You can use marketing analytics tools like Google Analytics to measure the effectiveness of your campaigns.

3. Focus on customer segments that can increase customer value

Nautilus Marketing focused its customer acquisition efforts on customers who were more likely to spend more or were more loyal to the company in order to reduce its customer acquisition cost (CAC) payback period (the time it takes to recoup the cost of acquiring a customer). “By focusing on higher-value customer segments, we successfully reduced our CAC payback period from six months to 4.5 months,” says Tom.

To try this strategy, use segmentation tools to profile your customers and identify potential customer groups within your customer base. Once you have identified these high-value groups, create a marketing strategy that is directly aligned with their needs, preferences, and behaviors.

Customer Acquisition Cost (CAC) FAQs