Customer Acquisition Cost: How to Calculate CAC [+Industry Benchmarks & Formulas to Know]
If you want to grow your ecommerce business, you need to attract new customers and make sure they stay loyal to your brand. But how much does it cost you to acquire each customer?
That's where Customer Acquisition Cost (CAC) comes in.
What does CAC stand for?
CAC stands for Customer Acquisition Cost. It's the total cost you spend to attract and acquire a new customer for your business.
What is Customer Acquisition Cost (CAC)?
Customer Acquisition Cost is a key metric that helps you calculate the cost-effectiveness of your marketing and sales campaigns. Knowing your CAC can help you:
- Make data-driven decisions about budget allocation
- Evaluate the effectiveness of your marketing and sales strategies
- Forecast your revenue and growth potential
- Benchmark your performance against your industry peers
Customer Acquisition Cost Use Case Scenarios
Here are some common scenarios where you might need to calculate your CAC:
- When launching a new product
- When entering a new market
- When scaling your business
- When optimizing your marketing and sales channels
How to Calculate Customer Acquisition Cost
Calculating your CAC may seem daunting at first, but the process is actually quite simple:
Step 1: Choose the time period for calculating.
Select a period of time (e.g., a month, a quarter, a year) and gather all the relevant data for that period.
Step 2: Calculate your CAC.
To calculate your CAC, divide the total cost of acquiring customers during the period by the number of new customers acquired during the same period.
Formula: Total cost of acquisition ÷ New customers acquired = CAC
Step 3: Compare your CAC to key business metrics.
Once you have your CAC, compare it to other key performance indicators (KPIs) such as Customer Lifetime Value (LTV) and Return on Investment (ROI). Ideally, your CAC should be lower than your LTV and your ROI should be positive.
Types of Costs to Include in a CAC Formula
There are several costs you should include when calculating your CAC:
The cost of running advertising campaigns to attract new customers.
The cost of paying your marketing and sales staff involved in acquiring new customers.
The cost of producing creative assets such as ads, landing pages, and videos.
The cost of building and maintaining your website, mobile app, and other digital channels.
The cost of publishing your content on social media, search engines, and other platforms.
The cost of producing and shipping your products to new customers.
The cost of storing and managing your inventory to fulfill new customer orders.
Customer Acquisition Cost Examples
Let's look at some real-world examples of how to calculate CAC:
Example 1: A Software Company
A software company spent $10,000 on Google Ads in one month and acquired 50 new customers during the same period. Their CAC is:
$10,000 ÷ 50 = $200
Example 2: A Consumer Goods Company
A consumer goods company spent $50,000 on a social media campaign in one quarter and acquired 200 new customers during the same period. Their CAC is:
$50,000 ÷ 200 = $250
Example 3: A Manufacturing Company
A manufacturing company spent $100,000 on trade shows and events in one year and acquired 500 new customers during the same period. Their CAC is:
$100,000 ÷ 500 = $200
Example 4: A Real Estate Company
A real estate company spent $5,000 on print ads in one month and acquired 10 new customers during the same period. Their CAC is:
$5,000 ÷ 10 = $500
LTV to CAC Comparison
While CAC is a useful metric, it only tells you half the story. To truly understand the lifetime value of your customers, you need to compare your LTV to your CAC.
LTV to CAC Ratio
The LTV to CAC ratio is the key metric that determines your profitability and growth potential as a business. Ideally, your LTV should be at least three times higher than your CAC. That means you're earning enough revenue from each customer to cover your acquisition costs and make a profit.
Customer Costs by Industry
Customer Acquisition Costs can vary widely depending on your industry and niche. Some industries, such as software and B2B services, have higher CACs due to longer sales cycles and more complex buying processes. Others, such as consumer goods and e-commerce, have lower CACs due to higher purchase frequency and easier onboarding.
How to Improve Customer Acquisition Cost
If your CAC is higher than your LTV, or if you're simply looking to reduce your acquisition costs and boost your ROI, here are some strategies you can try:
- Refine your target audience to attract more qualified leads
- Optimize your landing pages and conversion funnel to increase your conversion rates
- Test different ad formats and channels to find the most cost-effective ones
- Invest in content marketing and SEO to attract organic traffic and build brand awareness
- Create a referral program to incentivize your existing customers to refer new ones
- Offer promotions and discounts to incentivize first-time buyers and increase retention
Now that you know how to calculate your CAC and compare it to other key metrics, you can make data-driven decisions to optimize your marketing and sales strategies and grow your business. Remember that CAC is just one piece of the puzzle, and you should also consider other factors such as LTV, ROI, and industry benchmarks when evaluating your performance.