Marketing Glossary / Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC)
How to Calculate CAC and Why It Matters
Marketing leaders must optimize their tracked monthly and quarterly campaign metrics to demonstrate sustainable growth with the lowest customer acquisition cost (CAC) possible.
In this guide, we’ll explain what customer acquisition cost is, how to determine CAC and how to use key benchmarks to improve it over time while keeping expenses down.
What is customer acquisition cost?
Why is CAC important for marketing teams?
Marketing teams can use CAC metrics to understand their average spend to acquire a new customer. They can calculate it for different marketing channels over a specific period to determine which drove more customers with a lower CAC. The CAC calculation can, in turn, help marketers plan where to allocate their budgets for future marketing and advertising campaign strategies.
Calculating customer acquisition cost
- Ad campaign creative, copy, video production, and media buying budgets
- Email campaign creation and deployment
- Sales and marketing team salaries
- Content marketing and social media management budgets
- Sales and advertising tech stack budgets (e.g., analytics reporting, social media monitoring, advertising and email automation platforms, and CRMs)
- Product development costs to keep a Software as a Service (SaaS) or Ecommerce platform user-friendly, with an optimal customer experience
Some businesses also factor in these data points for a more robust picture of the total costs:
- Campaign special offers (e.g., free shipping) or discounts (e.g., 30% off for a limited time only)
- Overhead expenses like furniture and office or retail spaces used to acquire new customers
- Legal fees associated with sales and marketing campaigns or client contracts
Additionally, marketers must track how many new customers were acquired due to those efforts and through which channels or campaigns.
What is the customer acquisition cost formula?
There are some different approaches to consider when calculating customer acquisition costs. Generally speaking, the CAC formula is as follows:
Businesses often start with calculating the average customer acquisition cost for a specified period. For example, an ecommerce marketing team may spend $2,000 in one month to acquire 200 new customers. By dividing $2000 by 200, they determine their average ecommerce customer acquisition cost is $10.
What is the paid customer acquisition cost formula?
Marketers may also calculate CAC based on specific paid sales and marketing channels to identify areas of improvement or budget optimization. In this case, they may leave out their overhead expenses and employee salaries to only look at externally paid expenses related to customer acquisition costs.
Suppose a SaaS business spends $200,000 per month across two different advertising platforms, with a budget of $10,000 for each one.
Platform A: Generates 75 customers in one month ($10,000/75 = $133.33)
Platform B: Generates 150 customers in one month ($10,000/150 = $66.7)
Using the calculation above, the business might decide to allocate more money to platform B in the future as it generated a lower SaaS customer acquisition cost.
What is a good customer acquisition cost?
Some key factors influence whether a business’s customer acquisition cost offers a good return on investment (ROI).
1. Is the business new or entering a new market?
The customer acquisition cost for a business already established in a new market will differ significantly from a startup. The same goes for the CAC for a company that's trying to reach a new demographic or is about to sell in a new geographic region.
If marketers want to attract new markets or customer segments, regardless of the company's age, they can expect their CAC to be higher. We’ll provide some strategies to improve CAC over time shortly.
2. What is the CAC to CLV ratio?
It's important to relate CAC to a company’s customer lifetime value (CLV) to evaluate the ROI of customer acquisition costs. Many experts recommend that the CLV be at least three times greater for a CLV to CAC ratio of 3:1 or higher.
For example, a SaaS company may perceive its CAC as high at $200 to acquire a new customer. However, this may not be the case if their average customer retention rate is five years and each customer spends $400 on the SaaS platform annually.
Multiply a five-year customer lifetime X $400 to get an average CLV of $2000.
CAC to CLV ratio formula
CAC to CLV ratio formula
A simple equation would divide the CLV of $2,000 by the $200 customer acquisition cost to get a ratio of 10:1. So while the cost to acquire a new customer might have seemed high at first, the CLV to CAC ratio indicates that the average new customer provides a significant ROI to the business longterm.
When a ratio is that high, it’s a good indication that a business should invest more in sales and marketing efforts to attract new customers who fit a similar profile. Marketers can try retargeting strategies to increase conversions with highly-valued customer segments with similar online behaviors, such as the pages they often visit on branded or publisher websites and social networks.
Using data about a target customer’s previous interactions with sponsored content ads, retargeting helps marketers deepen customer relationships through specific and relevant messaging.
3. What’s the CLV to CAC ratio across different marketing channels?
If the CLV to CAC ratio is less than 3:1, marketers should evaluate their CAC across separate sales and advertising channels to identify and possibly remove or optimize underperforming channels.
If their CAC for email customers, for instance, is 2:1 and their paid ads on social media platforms are 5:1, they may reallocate budgets to invest more in paid ads that offer retargeting options. They may also look at ways to reduce the CAC for the email marketing platform in the future.
Effective strategies to improve CAC over time
1. Improve customer segmentation strategies
Businesses must invest in understanding customers and segmenting their strategies or campaigns by their most profitable personas.
This information can help sales and marketing teams better target audiences online, craft messaging, and develop ad or email creative that speaks directly to each segment or persona. Better segmentation can improve marketing campaign performance and reduce acquisition costs through highly targeted and optimized ads or emails.
To optimize creative and copy for key target segments or personas, marketers can use A/B testing to identify the best combination of imagery and messaging to drive the highest campaign results (e.g., click-through rates, form completions, or social media engagement).
Take the "Marketing: Customer Segmentation" course to learn how to better understand and target highly valued customers.
2. Use analytics to optimize conversions and customer journeys
Data and web analytics tools can help marketers grow their customer base with the same or a lower CAC. Start by collecting benchmark data using ad reporting and web analytics data, and look at historical performance and visitor growth on a monthly, quarterly, or annual basis. Map that data to specific seasonal campaigns or marketing strategies.
Next, look at the top web or landing pages that convert new customers from browsers to buyers or new leads via contact forms. Pay close attention to the bounce rate on those pages, and see if there are ways to improve conversions and customer journeys further into the website. The bounce rate tells marketers what percentage of people landed on the page, then left immediately to go elsewhere.
If the bounce rate is high, it’s clear that something on the page was off-putting to the visitor. Visit those pages to see if there is anything obvious that needs fixing. Also, look at the page load speed. Online visitors don’t like to wait too long for pages to render on their phones or laptops, so marketers may need to optimize pages to load faster to decrease the bounce rate and boost conversion rates.
For ecommerce sites, there might also be ways to increase conversions by optimizing the checkout experience. So be sure to look at the product pages and any pages a customer might visit after they click "add to cart." Also, identify where they might drop off and how to simplify the user experience. To improve conversions, refer to our course: "Marketing: Conversion Rate Optimization."
To optimize the customer journey, examine whether the copy and content on key landing or ecommerce pages provide enough information to ensure customers intuitively know what to do next. For more help, read "What is a Customer Journey Map? Key Benefits and Tools to Build Better Experiences."
3. Maximize sales and marketing costs
Look for internal sales and marketing costs that can be streamlined or reduced to increase CAC. Sales and marketing teams can also review their tech stack to identify platforms that don’t provide enough value.
It might make sense to shop around for more affordable solutions that can help reduce overhead costs. For example, many marketing automation platforms can scale a team’s efforts and free up employee time to be redeployed elsewhere.
Likewise, sales teams can look for solutions that optimize using their existing platforms.
For instance, some CRM tools integrate well with lead generation and account management platforms like LinkedIn Sales Navigator, which provides real-time network data that helps sales professionals personalize communications with new leads and accounts and close more deals faster.
4. Add value to grow retention rates
The longer a business can retain a high-valued customer, the less they need to spend on continuously finding new ones. Increasing customer satisfaction and lifetime value is, therefore, critical for improving customer acquisition costs over time.
Sales and marketing teams must continually look for ways to enhance customer service support and solutions to add value and boost retention rates. Regularly sending out open-ended customer satisfaction surveys and net promoter score (NPS) surveys on a quarterly or annual basis is an excellent way to gather feedback and benchmark customer success.
Businesses can also look at product reviews on their website or third-party sites to uncover areas for improvement. Likewise, actively listen to what customers say on social media to gather intel on enhancing product and service satisfaction.
5. Develop organic growth strategies
Finally, happy customers are always more likely to recommend a product or service to a friend or share articles or videos from their favorite brands online – without ever being incentivized.
Marketers must look for ways to grow their customer base organically through word-of-mouth referrals, social media, and content marketing strategies that appeal to their happiest customers. Customer satisfaction and NPS surveys will be helpful here, as well, to gather feedback on existing channel support and gauge the likelihood of product or service referrals.
Also, look for ways to deepen customer relationships via loyalty programs, exclusive offers, and connecting one-on-one through social media conversations. Remember, the more responsive and human a brand appears, the more likely a customer will feel seen and heard.
Refer to “How to Grow Your Brand’s Organic Following on LinkedIn” for more tips and strategies.
Customer acquisition costs reflect marketing growth potential
Frequently asked questions (FAQs)
1. What is customer acquisition cost vs. lifetime value (CLV)?
Customer lifetime value (CLV) measures how much revenue businesses can earn from customers throughout their sales relationship. This number is used to inform customer acquisition and retention strategies, which is why many marketers evaluate CLV metrics in conjunction with CAC. We’ll explore this metric later in more detail.
2. What is CAC vs. cost per action (CPA)?
Advertisers sometimes confuse CAC with their cost per action or CPA metrics. While CAC measures how much it costs to acquire a new customer through all sales and marketing efforts, CPA measures how many leads are generated through specific user actions after clicking on an ad – by filling out forms to drive event or webinar signups, content downloads, or free trial sign-ups. The cost to generate CPA leads can also be factored into the total CAC calculation as part of the advertising spend.