Customer Acquisition Cost (CAC): How to Calculate & Reduce It

Jun 14, 2022|Read time: 11 min.

RJ Licata Director of Marketing

Key Points

Understand lawsuit acquisition outgo (CAC) and customer beingness value (CLV), and you’ll beryllium connected your mode to strengthening the fiscal wellness of your brand. Once you cognize your existent CAC, you tin optimize your selling funnel, fortify your caller acquisition capabilities, and execute a higher nett margin.

Want to summation your instrumentality connected concern (ROI) adjacent more? Change your attack to selling spending. For example, you tin power from paid to integrated channels oregon put successful lawsuit retention. Most brands person aggregate opportunities to little CAC oregon summation CLV, but you request to cognize wherever to focus.

Read connected to larn astir CAC and CLV and to spot however to marque them enactment harder for your brand.

What is lawsuit acquisition outgo (CAC)?

CAC is the full income and selling outgo to get a caller customer. To recognize your CAC, make a database of your income and selling expenses, including:

Then, comparison this against the fig of customers acquired during the aforesaid clip period. But to summation a truer consciousness of the worth of those caller customers and the ratio successful securing them, multiply the fig of caller customers by their beingness worth (sometimes called LTV).

ROI is the fig 1 crushed to way CAC, but the CAC calculation besides helps you find inefficiencies successful your business. Use CAC to assistance optimize your selling funnel and lawsuit acquisition strategy. In turn, you’ll amended your wide nett margin.

Additionally, look astatine your customers long-term. Customer retention is an important metric to way successful bid to trim churn and summation profits. Understanding lawsuit retention helps you to maximize the worth of each caller customer.

Why is it important to measurement lawsuit acquisition cost?

It’s important to recognize what your customers are consenting to wage for your products and services. However, that’s lone a constricted presumption into the wellness of your business. The outgo of acquiring a caller lawsuit helps you much accurately recognize your brand’s fiscal health.

For example, let’s accidental that you’re an endeavor bundle company. You look astatine the income cycle, pb conversion rate, the fig of caller customers, and different metrics to recognize your profitability. But your quality to standard the concern comes down to your CAC. 

The eventual sustainability of your gross exemplary hinges connected a debased CAC. The little the better.

If you’re a SaaS startup, investors volition look astatine your CAC to spot if your institution is worthy the risk. CAC demonstrates the imaginable scalability and profitability of a concern model.

To payment from knowing your CAC, comparison it to the beingness worth of your paying customers. With a precocious CLV-to-CAC ratio, you’ll bask precocious nett margins and beardown finances. 

With precocious margins, you besides person a fiscal cushion, giving your concern greater flexibility to accommodate to changing marketplace conditions. For example, you tin little prices if you request to oregon if you privation to enactment unit connected competitors.

On the flip side, with a debased CLV-to-CAC ratio, your concern has precise small flexibility to maneuver. It’s apt a motion of pricing problems, interior bloat, oregon inefficient operations. If you privation to beryllium much assertive connected terms to onshore a ample caller client, you astir apt won’t person the leeway. 

Furthermore, a mediocre ratio tin bespeak aboriginal currency travel problems that mightiness harm the fiscal instauration of your business. If the ratio is negative, past you’ll request a superior fiscal overhaul.

How to cipher lawsuit acquisition cost

Are you acceptable for immoderate math? It’s clip to cipher your customer acquisition cost. It’s simple. Divide the full outgo of income and selling by the full fig of customers acquired during a circumstantial play of time.

Total outgo of income and marketing

___________________________

Total fig of customers acquired

Let’s accidental that you walk $1,000,000 connected income and selling per quarter. During this time, you get 10,000 caller customers. So, your CAC would beryllium $100 successful this case. It’s a straightforward calculation.

Costs to see successful the lawsuit acquisition outgo formula

If you privation to interruption down the CAC look into much granular detail, see utilizing this much analyzable calculation:

Customer Acquisition Cost (CAC) = (Marketing Campaign Cost [MCC] + Sales & Marketing Wages [W] + Other Sales Costs [S] + Professional Services [PS] + Overhead [O]) / Total Customers Acquired [CA]

You tin besides adhd different applicable income and selling costs to customize a look that works for your brand.

Customer acquisition outgo examples

Let’s instrumentality these numbers and enactment them successful real-world situations.

How to cipher CAC for a SaaS company

A SaaS institution launching a caller video storytelling instrumentality hired a selling agency. The agency’s occupation was to execute a selling run that promoted the launch. The agency’s fees were $10,000, and they spent an further $20,000 connected landing pages, societal media marketing, and pay-per-click advertising. The magnitude of wealth spent connected interior unit and overhead costs were $20,000. Therefore, the full selling outgo of their engagement was $50,000.

This selling run brought successful 250 caller customers. Divide $50,000 by 250, and the full CAC is $200.

How to cipher CAC for a Beauty Brand

A quality marque launched a caller cleanable constitution line. For this ecommerce selling campaign, they hired a selling bureau to absorption connected media, and different bureau to execute PR and influencer selling for the 30-day blitz. The media bureau charged $15,000 for services, and $100,000 for media buys and retargeting. In-store promotions outgo an further $100,000.

The PR bureau charged $50,000. This included media outreach and engagements with an service of micro-influencers for the campaign. The interest for the influencers was $50,000. The contented was developed internally, but an extracurricular decorator was used, adding $5,000 to the outer outgo of the launch.

Internally, a scope of executives and employees from antithetic departments were involved. They were progressive earlier and aft the motorboat of the constitution line. Internal teams did show analysis, reporting, and meetings post-launch. In total, their wages and their associated overhead, including contented development, totaled $60,000.

The full outgo of the run was $380,000, and they acquired 100,000 caller customers. Therefore, the CAC equaled $3.80.

Comparing CAC per integer selling channel

A astute attack for you to optimize CAC is to reappraisal your numbers by integer selling channel. This way, you place the existent ROI for each of your selling efforts.

To find which transmission your lawsuit is coming from, take your attribution model. This could beryllium first-touch attribution oregon last-touch attribution. Or you tin use multi-touch attribution, which is much accurate. With multi-touch attribution, you tin either arsenic measurement each interaction constituent oregon use weighted attribution based connected the power of each idiosyncratic interaction point.

First-touch attribution: With first-touch attribution, the transmission that acquired the lawsuit archetypal (often apical of the funnel) gets the credit. This exemplary tin assistance you recognize what’s driving the archetypal touchpoint successful a conversion path.

Last-touch attribution: Which transmission closed the deal? This is the past interaction successful an attribution model. Last-touch attribution is offered arsenic a default connected galore analytics tools.

Equally weighted multi-touch attribution: In this model, delegate each lawsuit touchpoint the aforesaid outgo and value. The payment of this exemplary is its simplicity. However, you won’t get true, close CAC by channel.

Weighted multi-touch attribution: This exemplary is the astir accurate. Separate each touchpoint successful the conversion funnel and delegate a worth to each based connected the idiosyncratic channel’s value. If you tin measure the existent value, that would beryllium astir invaluable for your calculations. However, immoderate companies trust connected marketplace premix modeling to assistance them delegate a worth to each channel, delivering a capable estimation.

With your attribution accusation successful hand, present is simply a step-by-step attack to comparison selling channels for CAC.

1. Define the channels

First, reappraisal each trackable channels you’re utilizing and adhd them to a spreadsheet. These channels whitethorn see hunt motor optimization (SEO), email marketing, societal media, and contented marketing, to sanction a few.

2. Determine transmission expenses

Review each transmission and corroborate the costs. You’ll privation to see staffing, bureau fees, advisor fees, tools, and advertizing costs.

3. Attribute which transmission acquired each customer

After deciding connected your attribution model, place the applicable transmission costs based connected your analytics, tracking, and lawsuit data.

How to amended lawsuit acquisition costs

No 1 has ever said, tin I wage more? The aforesaid goes for CAC. There are 2 main ways to trim your outgo per acquisition: minimize expenditures and amended lawsuit retention.

Reduce expenditures

One of the champion ways to trim selling expenditures is to absorption connected integrated channels.

Swap pay-per-click (PPC) advertizing for SEO: Many brands get dazzled by the contiguous results of PPC, but it’s expensive. And arsenic soon arsenic you halt paying for the ads, those benefits adust up. Plus, owed to the costs, PPC is not a viable enactment astatine the apical of the funnel.

In contrast, integrated hunt has a agelong lifespan, providing compound ROI for years alternatively of the magnitude of a short-term run similar paid media. This yet reduces your costs successful acquiring caller customers. According to Google, ROI from organic hunt is 5.3X compared to 2X from paid search.

According to a Terakeet-commissioned study by Forrester Consulting, customers sourced done SEO besides thin to beryllium much loyal and engaged, further reducing their semipermanent costs.

Lean connected further integrated channels: Beyond integrated search, trim your selling walk by turning to different integrated channels. These whitethorn see contented marketing, email marketing, societal media, etc.

Optimize your funnel: You mightiness person large website postulation but request to improve your ecommerce conversion rate. Analyze your tract analytics to spot wherever users exit your website. Conduct a contented audit and way conversion rates. These metrics volition assistance you optimize your conversion funnel, streamline the acquisition process, and amended lawsuit acquisition rates.

Use income tools: If you aren’t already, adhd a selling automation strategy to your selling exertion stack. This benignant of level reveals opportunities for betterment successful the lawsuit journey. For example, you tin way the ROI of your selling channels portion besides streamlining your assemblage engagement processes.

Improve lawsuit retention

Next, absorption connected reducing lawsuit churn. On average, repetition customers walk 67% much successful the 3rd twelvemonth of their narration with a institution than successful earlier years. It costs five times much to get a caller lawsuit than to clasp an existing customer. Therefore, higher lawsuit retention leads to accrued profits.

To trim churn, usage selling strategies like:

• Customer education: Continually amended your customers, and they volition get much retired of your products and services. As such, they volition beryllium much apt to proceed arsenic a lawsuit implicit the agelong term.

How lawsuit beingness worth impacts CAC

Now that you cognize the value of calculating your lawsuit acquisition cost, measurement your lawsuit beingness worth next. The CLV is the full gross produced by the mean lawsuit passim their narration with your brand. High CLV is simply a motion of fiscal spot and semipermanent stability. It typically indicates beardown marque loyalty and recurring revenue.

We cipher the beingness worth of a lawsuit successful the pursuing way:

• Define your mean lawsuit lifespan.
• Determine the mean full fig of purchases during the clip frame.
• Calculate your brand’s mean bid value.
• Multiply the fig of orders by the mean bid worth during the lawsuit lifespan.

The clip play volition beryllium connected your business. For example, the CLV is calculated for definite businesses implicit a fewer months. For others, it’s calculated implicit years. And with different businesses, the CLV extends implicit decades.

CLV for concern optimization

There are assorted ways to summation beingness value. For example, upselling and cross-selling, subscription services, loyalty programs, oregon a beardown lawsuit nurture program.

CLV shows which lawsuit segments bring the astir semipermanent worth to your business. This is important due to the fact that the worth goes beyond a one-time merchantability oregon campaign. In fact, your margins and CAC volition proceed to amended the longer your clasp a customer.

Use CLV information to usher your new lawsuit acquisition plan and intelligently allocate retention resources.

The higher your lawsuit beingness value, the much nett you tin walk connected selling to caller customers. Then, your caller lawsuit accounts volition turn arsenic well. It is simply a cyclical relationship.

To amended your CLV, bid your lawsuit occurrence and lawsuit work teams connected selling tactics. They are connected the beforehand lines with your existing customers, truthful their interactions tin power marque loyalty, churn rates, and yet CAC.

The CLV to CAC ratio

Your lawsuit beingness worth and lawsuit acquisition costs enactment unneurotic to summation your profits oregon little them.

To that end, analyse your CLV to CAC ratio:

• Ratio little than 1 = Losing wealth connected lawsuit acquisition
• A ratio adjacent to 1 = Breaking even
• The ratio from 2 to 5 = Achieving profitability
• A ratio supra 5 = Suggests that spending much wealth connected selling could amended lawsuit acquisition results

If you way these metrics together, past you tin summation profitability crossed your organization.

Customer Acquisition Cost FAQs