Glossary definition: Customer Acquisition Cost (CAC)

Customer acquisition cost (CAC) is a metric that measures the total amount of money spent on acquiring new customers. It is calculated by dividing marketing expenses by the number of customers acquired in the period those expenses were incurred.

The costs you can include in your customer acquisition cost calculation include:

Customer Acquisition Cost (CAC) is the total amount you spend to acquire a customer, including:

  • Marketing expenses, like online ads and print ads.

  • Referral commissions paid to third parties for referring prospective customers.

  • Wages and salaries of your sales team members.

If you're calculating CAC for your SaaS company, make sure to include everything that relates to how much you pay or invest in order to get a new customer—even if it's not directly related to marketing!

Marketing expenses (online ads, print ads, referral commissions, etc.)

Marketing expenses are any money spent to acquire new customers. These include online ads, print ads, referral commissions and more.

Marketing costs can be one-time or recurring; they may also have fixed or variable costs.

  • Marketing costs include costs incurred by a company that uses digital channels to reach customers online (including search engine optimization, paid search advertising such as Google AdWords or Bing Ads), display ads like Facebook Ads or YouTube video ads, social media ads such as Facebook Live Sponsored Content and promoted tweets on Twitter.

Your labor cost (wages and salaries)

This is the most obvious expense when it comes to customer acquisition. It includes the cost of your time, but also the costs of hiring staff, freelancers or contractors and outsourcing work if you're unable to do it yourself.

Your technology costs (CRM, marketing automation, etc.)

This can include the costs of setting up a CRM, marketing automation platform, and website. Additionally, it could also include the cost of hiring developers to build your website or even developing your own app. It also includes any SaaS licences or tools related to customer acquisition.

Basically, CAC encompasses everything that relates to how much you pay or invest to get a new customer.

Customer acquisition costs include all of the money you spend to get a new customer. This can be advertising, marketing expenses, labor, technology costs and other investments that go into acquiring customers.

The CAC is determined by calculating the total cost of all your marketing activities (including employees' salaries) divided by your number of new customers acquired during a specific time period.

CAC = Costs of sales and marketing / Number of New Customers Acquired in Period

You should calculate a specific customer acquisition cost for each channel.

Given the cost of acquiring customers, it is critical to understand how much you are paying for each channel. The best way to do this is by calculating the customer acquisition cost (CAC) for each channel.

The formula for CAC per channel is:

  • [Total spent on channel] / Number of Customers Acquired = CAC

For example, if your company sold spent $5 million on marketing on Facebook to get 100k new customers, then your CAC would be $5 million divided by 100k — $50 per customer.

This will help you understand where you get the highest value for your investment and where you should focus your budget in future campaigns.

A CAC calculation is a great way to understand where you get the highest value for your investment and where you should focus your budget in future campaigns.

How do I calculate the CAC for my business?

To calculate the CAC for your business, take a look at your marketing and sales expenses. Divide the total amount of money spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent.

How to gauge if customer aquisition cost is too high?

It's important to be able to gauge whether your customer acquisition cost is too high or low. You can do this by answering the following questions:

  • How much money do I need to make a profit?

  • How much money do I need to break even?

  • What is the total amount of money spent in acquiring new customers (e.g. advertising, sales commissions)

  • How many customers did it take to acquire one additional sale/conversion., and what was their lifetime value (LTV)?

  • What scale do I need for the unit economics of my business model to work?

  • If I continue spending at this rate to acquire customers, how much runway will I have before I break even or run out of cash?

How can startups cut customer acquisition costs?

First of all you should start by creating a customer journey map, which will help you optimize your marketing strategy and see where you can target to bring more leads through the funnel.

Here are some tips on how to do that:

  • Use the right tools for the job. Having the correct tools can help with automation, reducing labor requirements. Salaries are typically one of the highest expenses, so anything that can allow you to do more with less will help reduce CAC.

  • Focus on channels that give you the most value for their cost, and zero in on the tactics that work for your niche or industry. While social media ads might be hugely effective for a direct-to-consumer brand, be ruthless in cutting back budgets if you don't see results, and pivot to search ads or paid media if they are performing better.

  • Using targeted promotions can be an excellent way to increase margin while still creating a value proposition for customers. General coupons or discounts can lead to expensive campaigns that are less personalized. By increasing the targeting you both reduce the pool of eligible customers while making them more relevant to the ones you want to focus on.

How to decrease my user acquisition costs?

To increase the number of customers paying you, you should focus on acquiring those who are more likely to pay. This includes targeting your ideal customer with marketing campaigns and refining your product so it’s more appealing to users who will pay for it.

You can also decrease your CAC by using a customer acquisition cost framework to help guide decisions related to when and where you should spend their budget. There are various metrics you can use, such as lifetime value and average order size (AOS). This allows you to quickly determine whether their strategy is working well enough.

What are some of your favorite tools for customer acquisition?

Paid acquisition is a great way to acquire customers. It's easy and straightforward, but can be expensive if you don't know how to do it well.

Organic acquisition is when you get new customers by making your product visible in search engines like Google and Bing.

Referral acquisition is another good way to get new customers, because people tend not to make referrals for things they don't like or trust! Referral networks can be very powerful when done properly.

Affiliate programs are great for acquiring new users at no cost (or minimal cost), but only work with certain types of products/services and companies that have affiliates on board already.

Discount and coupon campaigns are also effective ways to generate new business.

Are there any customer acquisition frameworks?

Customer acquisition frameworks are a way to structure your customer acquisition process. They help you to identify the right customer acquisition channels for your business, and by doing so, they reduce the risk of wasting time on activities that are not working.

The some popular frameworks are:

What is paid acquisition?

Paid acquisition is the process of paying for customers through advertising. Paid acquisition can be done through social media ads, paid search, display advertising and other channels. Typically this is done by a third-party advertising platform since it's important to have a good understanding of who your target market is and how they use the internet.

This method of customer acquisition can be very effective because you're able to reach new people who have never heard about your business before. Paid acquisition campaigns will typically have an ROI (return on investment) attached to them so that you know exactly what kind of return on investment your campaign will give you over time.

Conclusion

Customer acquisition costs are an important metric to measure the health of your business. They tell you how much it costs to acquire new customers and give you a basis for comparing different channels by knowing how much they cost per lead or purchase made. This information can help with decision-making in terms of marketing budgets, since it lets you prioritize which channels work best for acquiring new customers at the lowest cost possible.

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