Customer Acquisition Cost (CAC) Formula and Examples

Customer Acquisition Cost (CAC) Formula and Examples

Consumer businesses live or die based on their ability to profitably acquire new customers. Defining and calculating your customer acquisition cost (CAC) is one of the most critical financial metrics you need to track. This article will explore standard methods for determining CAC and strategies to optimise it.

What is Customer Acquisition Cost?

Your customer acquisition cost represents the average cost of acquiring a new customer. It's calculated by dividing all your new acquisition marketing expenditures in a given period by the number of new customers gained in that same time frame.

CAC Formula:

Total Acquisition Marketing Costs / Number of New Customers = CAC

For example, if you spent $20,000 last month on sales and marketing activities that produced 1,000 new customers, your CAC would be $20 per customer acquired.

Understanding your customer acquisition cost empowers you to calculate your payback period—the time it takes to recoup your initial new customer investment from that customer through their transactions. We'll explore the payback period more later on.

First, look at some key reasons why tracking CAC should be a priority.

Why Track Customer Acquisition Cost?

Monitoring your customer acquisition cost delivers several critical insights:

• Gauge Profitability – Knowing your CAC helps determine your customers' profit margin and lifetime value. This tells you if your business model is financially viable.
• Identify Effective Channels – Breaking down CAC by marketing channel highlights the most cost-efficient acquisition strategies.
• Spot Trends – Tracking changes in CAC over time can reveal positive or negative trends in the efficiency of your customer acquisition efforts.
• Set Targets – Establishing a target CAC per customer segment focuses on marketing spend and helps drive desired outcomes.
• Inform Budgets – The cost of acquiring customers impacts the budgets needed to hit growth projections.

Understanding CAC allows you to allocate resources better to fuel sustainable business growth.

Next, let's examine popular methods for calculating customer acquisition costs.

CAC Calculation Methods

While the basic CAC formula is straightforward, some key factors impact how you should approach quantifying your total acquisition marketing costs and the number of new customers gained.

Standard CAC calculation methods include:

1. Straightforward Method

This simple approach works best for companies with few clearly defined acquisition channels.

• Numerator – Sum all external marketing costs for a defined period
• Denominator – Count new customers acquired in the same period

The straightforward method hinges on cleanly attributing customers to specific acquisition channels, which becomes complex with multiple touches or online channels.

2. Algorithmic Attribution

Algorithmic modelling aims to tackle the multi-touch attribution challenge by algorithmising acquisition credit across interactions.

• Apportions credit to multiple channels based on predictive influence on conversion
• It is more complex but accounts for nuance in the customer journey.
• Relies on robust analytics tracking and modelling

SaaS tools like Baremetrics offer algorithmic CAC reporting.

3. Marginal Cost Method

This concept focuses on quantifying the incremental expense of acquiring the next customer.

• Accounts for fixed vs variable acquisition costs
• Calculates marginal cost of edging customer count up by one
• Provides a forward-looking benchmark for optimal spend

The marginal cost method sets a target for what expanding your customer base can cost-effectively support.

Let's explore five key components that feed into your total customer acquisition costs.

5 Key Components of Total Acquisition Cost

Successfully quantifying CAC requires identifying all sources of customer acquisition spending. Standard acquisition cost components include:

1. Advertising Costs

• Digital ads (Google, Facebook, etc.)
• Print, TV, radio ads
• Direct mail campaigns
• Any ads specifically driving new customer sign-ups

2. Marketing Agency Fees

• Digital marketing consultancies
• Creative and branding agencies
• PR firms focused on awareness
• Percentage tied to new customer acquisition

3. Sales Team Costs

• Sales representative salaries
• Sales operations staff
• Sales software/tools
• Portion responsible for new leads/customers

4. Promotional Discounts

• Temporary price reductions
• Free gift incentives
• Percentage allocated to customer acquisition

5. Referral Programs

• Referral fees/bonuses
• Cost of promos and software
• Again, this is tied to the new customer tally

Isolating these costs gives a 360-degree view of acquisition spending. Now, let's examine best practices for counting newly acquired customers.

Best Practices for Counting New Customers

Using well-defined rules for what constitutes a new customer ensures CAC calculations are consistent and accurate. Here are some essential best practices:

• Set a Clear Timeframe – Standardise a specific window, like 60 or 90 days, without a transaction to count as a new customer.
• Avoid One-Offs – Be wary of one-time shoppers who will skew average costs. Monitor repeat transaction rates.
• Identify True Influence – Watch for false positives from broad promotional campaigns and discard sign-ups not linked to marketing spend.
• Break Out Segments – Calculate CAC separately for customer segments with significantly different acquisition costs.
• Track Channel Source – Tag each new customer with the marketing channel influencer to enable optimization.

Getting an accurate new customer count requires some upfront work—but pays dividends through trustworthy CAC figures.

Now, let’s explore five critical strategies for optimising customer acquisition costs.

5 Customer Acquisition Cost Optimisation Strategies

Once you have a solid handle on your current CAC, you can apply levers to reduce it. Here are five proven CAC optimisation frameworks:

1. Improve Targeting Precision

• Narrow focus to well-defined buyer personas
• Serve hyper-targeted ads to likely prospects
• Waste fewer dollars on low-potential sign-ups

2. Double Down on Top Performers

• Identify the most efficient acquisition channels
• Shift budget toward high-ROI channels – strategically calls for a reduction in low-ROI areas.

3. Monitor Competition Spend

• Benchmark competitor CAC for perspective
• Watch for changes in rivals’ spending
• Maintain desired market competitiveness

4. Test New Channel Ideas

• Pilot innovative new outreach ideas
• Measure test CAC vs control group
• Scale winners, kill losers

5. Automate Where Possible

• Use chatbots to engage prospects
• Build signup and onboarding flows
• Lower reliance on expensive humans

Now that we’ve covered calculating and optimising CAC let’s examine how to use it to determine your customer payback period.

Using CAC to Calculate Payback Period

Your customer payback period represents the time it takes to recoup your initial acquisition investment through that new customer’s business.

You can calculate the payback period by determining customer lifetime value (LTV)—the total revenue expected from a typical customer relationship. Then divide LTV by CAC:

Payback Period Formula:

LTV / CAC = Payback Period

For example, if your:

• Average customer lifetime value (LTV) is $400
• You spent $100 to acquire this customer
• Payback Period = $400 LTV / $100 CAC = 4 months

Ideally, you want to acquire customers with a payback period significantly shorter than their anticipated customer lifetime. This generates substantial profit from each customer.

Next, let’s examine key statistics that highlight healthy CAC benchmarks to aim for.

Key Customer Acquisition Cost Statistics

Understanding industry average CAC figures provides a helpful context in interpreting your numbers. Here are a few insightful benchmarks:

• The average CAC across online software companies is $215 ($200 median).
• Top-performing SaaS firms have CAC at around 40-50% of average LTV.
• The average payback period is 5-8 months for many online services.
• The average monthly website visitor-to-customer % conversion rate is 3%.
• The typical visitor-to-lead % conversion rate is 5%.
• Benchmark lead-to-customer % conversion rate is 10-25%.

So, for a SaaS company with a $500 LTV and a 3% visitor-to-customer conversion rate, a reasonable CAC benchmark would be:

• Target visitor-to-lead conversion >= 5%
• Target lead-to-customer conversion >= 15%
• Implies CAC ~$200 = 40% of $500 LTV

Next, look at a few examples applying the CAC concepts covered.

Customer Acquisition Cost Examples

Consider the following scenarios for how CAC can be calculated and applied:

Online retailer example

• Spent $400k last year on marketing
• Gained 200k first-time customers
• CAC = $400k / 200k = $2 per new customer

SaaS company example

• 130k total new customers last year
• $15 million total sales and marketing budget
• 25% of the budget tied to new customer acquisition
• CAC = $3.75 million (25% * $15 million) / 130k customers = $29 per customer

Gym membership example

• Ran radio ads costing $5k over 2 months
• Signed up 100 new members during the campaign
• No other acquisition channels
• CAC = $5k ad spend / 100 new members = $50 cost per new member

As you can see, CAC differs significantly across industries, business models, and marketing strategies. However, the same principles apply in understanding payback periods, break-even points, and acquisition ROI.

Key Takeaways and Action Steps

Tracking and optimising customer acquisition costs is mission-critical, but doing it right involves some heavy lifting. Here are the key takeaways:

CAC Fundamentals

• Calculates avg. spend to acquire each new customer
• Quantifies acquisition marketing ROI
• Helps strategically allocate spend

CAC Calculation

• Total costs divided by new customers
• Requires identifying all cost components
• It needs consistent new customer counting

Optimisation Levers

• Improve targeting precision
• Double down on efficient channels
• Automate where possible
• And more!

Next Steps

• Gather inputs required for the initial CAC baseline
• Set processes for ongoing data collection
• Build models allocating multi-touch credit
• Utilise benchmarks and LTV context for insights
• Identify top-priority optimisation hypotheses

With these foundations around your customer acquisition cost, you’ll be well-positioned to accelerate profitable growth!

Frequently Asked Questions

Here are answers to some common questions about calculating and applying customer acquisition costs: