Customer Acquisition Cost (CAC) is exactly what it sounds like: The amount of money that a brand spends on acquiring new customers. CAC is most often used to measure the total cost of converting a lead into a paying customer.
You can think of CAC as what you spend to acquire a customer. A related metric, Lifetime Value (LTV), is what you earn from them over their lifetime. As a business you need LTV to exceed CAC for a profitable business. From a marketing budget perspective, it's a critical metric for helping businesses understand their return on investment.
CAC can be calculated by adding the total costs incurred when converting prospects into customers. These may include costs associated with sales, marketing, and advertising. The cost is then divided by the amount by the total number of customers acquired during a given period, such as a month or quarter.
This metric is important because if the actual user acquisition cost exceeds revenue for long enough, organizations risk going out of business. As such, it’s a critical metric and its use has risen dramatically in recent years as more and more organizations use web analytics platforms and data insights to strengthen their decision-making.
Tracking CAC in this way also allows businesses to compare their performance across their products and customer segments. For example, you may find that paid search drives a lower CAC than social media ads. Or, you might discover that enterprise buyers have a higher CAC, but that they deliver longer-term value. This level of granularity is critical for businesses to understand.
How to Calculate Customer Acquisition Cost (CAC):
FAQs
This term refers to the total cost that a brand incurs to acquire a new customer, including marketing and sales expenses, divided by the number of customers acquired during a specific period.
Understanding helps brands evaluate the effectiveness of their marketing and sales strategies, determine the ROI of marketing efforts, and make informed decisions about resource allocation.
Strategies for reduction include optimizing marketing campaigns, improving lead quality, increasing customer retention, and leveraging cost-effective acquisition channels.
A "good" CAC varies widely by industry and business model. Still, a general rule of thumb is that the Customer Lifetime Value (CLV) should be at least three times the CAC. This ratio can help you make sure you get long-term profitability and sustainable growth.
