Customer acquisition cost (CAC) is a vital metric used by businesses worldwide to determine the resources they need to continue growing by attracting new customers.
If your company wants to expand its customer base while generating more revenue, it’s crucial to understand what CAC means, its importance, and how to calculate it.
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So, let’s get started by defining CAC.
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What Does CAC Mean?
The CAC for your company is the total marketing and sales costs it spent to acquire new customers during a specific period.
Those total costs include everything that goes into your marketing campaigns and sales team, like program and marketing spend, commissions, salaries, bonuses, and overhead expenses associated with gaining leads and converting them.
The most successful companies constantly aim to reduce their CAC—it’s not just a way to recoup revenue; it’s also a sign of healthy sales, marketing, and customer support programs.
Easily Calculate Your CAC With These Three Steps
Businesses need to understand their CAC to determine if the money they’re spending to attract new customers is worth it. The overall goal is to reduce the number. However, before you can get started on reducing your CAC, you need to know the right way to calculate it.
Follow these three steps to easily calculate your CAC:
1. Narrow the Scope of Your Data
The first step in calculating your CAC is simple—you need to determine which time period you want to evaluate (month, quarter, and year are common). Doing this helps you narrow the scope of your data so that you can move to step two: adding together your sales and marketing expenses.
2. Include the Right Costs
Getting your marketing and sales costs correct is the most important part of calculating your CAC. Typically, when the numbers seem off, it’s because you forgot to include something.
Don’t forget these crucial expenses in your CAC calculations:
Ad spending is pretty self-explanatory—it’s any money you spend on advertisements. For most businesses, it’s a core way to attract new customers. And you can even calculate if you’re seeing adequate returns on your campaigns easily by dividing the revenue it produces by how much you spent. It’s also a crucial number to include in your CAC calculations.
Creative costs consist of how much you spend on creating content. Whether it’s hiring teams to promote your product or buying lunch at a team meeting, they all factor into your content production, and you need to know these costs to calculate your CAC.
Every good business knows that the best employees are worth the investment. So, keep that in mind when approaching this expense if you feel it’s too high. Usually, there are alternative options you can choose to reduce this category of costs other than looking to pay cuts, layoffs, etc. For example, many businesses have reduced these expenses by investing in marketing automation and chatbots to supplement their team’s workflow and increase their productivity. But unfortunately, these costs are also often overlooked in CAC calculations.
When your marketing campaign launches, there are always publishing costs—another overlooked element of calculating your CAC. These costs include money spent for advertisements on TV, social media, newspapers, magazines, etc.
Your marketing and sales teams likely use technology to get the job done. Any tools you purchase for use in a campaign need to be included in your CAC calculations. For example, a typical technical cost is buying a reporting tool to track the progress of your team’s open and closed deals.
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Inventory upkeep is a simple cost for companies that sell physical products—it includes storage fees, utility bills, etc. But what if you’re a SaaS company that sells software? You still need to include inventory upkeep costs in your CAC calculations, but what are they? The money you spend on patches and updates to maintain and optimize your products fall into this category.
Your production costs are what you spend to physically create content. For example, if videos are part of your campaign, you probably bought or rented cameras, created a set, paid for editing services, etc. All of those add up, particularly if you involve third-party creators to produce the content. So don’t skip over these expenses during your CAC calculations.
3. Add Your Costs, Divide By New Customers
We know step two was a lot of info to take in, but don’t worry—step three is simple. Once you’ve determined the time frame you want to work with and added up all of your costs mentioned above, all that’s left is following a simple formula:
CAC is your marketing and sales costs over the determined time period divided by how many new customers you acquired in the same amount of time. That’s it—that’s your CAC.
Now, let’s see what that CAC calculation looks like in practice.
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Calculating CAC: a Real World Example
Let’s look at some CAC examples for different types of companies:
Let’s say that a software company spends $50,000 on its marketing campaign. After the campaign ran, the company gained 2,000 new subscriptions to its service.
However, there’s another number to look at: the company expects to spend another $65,000 on production and technical costs for its new customers. Now let’s take those numbers and calculate the CAC.
CAC: ($65,000 + $50,000) ÷ 2,000 = $57.50
So, our fictional software company spent $57.50 for each new customer they acquired during their campaign.
Wrapping Up CAC
You can only make informed business decisions and make long-term profitability predictions by understanding what your company’s costs are to bring in new customers. So, sooner rather than later, you’ll need to calculate your CAC—luckily, these three steps make it simple. Once you know your CAC, you can begin to better allocate your resources to get the most out of each marketing campaign.
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