What is CAC? Customer Acquisition Cost Explained

Striking the perfect balance between splashing the cash enough to grow your business while staying on track for projected profitability is something that any business striving for success should be working on. At the heart of these costs is customer acquisition and everything your business is doing to gain new customers, alongside retaining old ones.

In this guide, we’ll be explaining what customer acquisition cost is in detail, why it’s important and how to approach measuring CAC.

To calculate your customer acquisition cost, follow the three simple steps below.

Step 1: Determine the time period for calculating

The first step is to narrow down your data to a specific period, such as a quarter, month or year. It can often be useful to choose a few periods to compare the costs and see if they’ve increased or decreased.

Step 2: Calculate your CAC

To find out what your customer acquisition cost is, simply divide the cost of your sales and marketing by the number of newly acquired customers from the period determined in the previous step. The result will tell you what your customer acquisition cost is.

You can also use the customer acquisition cost formula:

Customer Acquisition Cost = Cost of sales & marketing/number of customers

We’ve created a CAC calculator for businesses to use, which you can find below.

Step 3: Compare your CAC against key business metrics

Once you have your CAC, this can be compared to other key business metrics to discover insights about your sales and marketing. Metrics like conversion and bounce rates can be useful to look at, since these will help you find out more about the effectiveness of your marketing campaigns.

The payback period is an essential part of CAC, even though it’s often seen as an extension of it. The payback period refers to the amount of time it takes for a customer to pay back the cost of their acquisition. The shorter this period is, the better since that means your business can quickly recoup the investment put into acquiring each customer.

Imagine your CAC is £30, and you managed to acquire 100 customers in Q1. This would leave you with a total sales and marketing spend of £3,000 for that period. With a revenue of £1,000 for Q1 and £1,500 for Q2 respectively, you’d be left with a combined revenue of £2,500 for the two quarters. £3,000 divided by £2,500 is 1.2, so it would take just over one quarter to pay back the cost of acquisition.

The formula might be relatively simple, but understanding which costs should be included in your calculations can be slightly more difficult. Sales and marketing encompass a range of costs – some being much more obvious than others. And since every penny makes a difference, it’s important that nothing is missed. Below are some of the most important costs to include in your calculation.

• Ad spend: The money your business spends on any advertisements, including any associated costs such as marketing agency fees.

• Employee salaries: The salaries of your marketers and sales staff, whether these are in-house or freelance.

• Creative costs: Any costs associated with creating content for your business, such as acquiring brand ambassadors.

• Technical costs: The costs of any technology implemented to help acquire customers, including business forecasting 

• Publishing costs: Anything spent on releasing your sales and marketing campaigns, from TV airtime to paid social media ads.

• Production costs: Whether this includes your copywriting budget or the cost of equipment to produce content, your business should add in any production costs.

• Inventory upkeep: Any money spent on maintaining and optimising your inventory should be included in your calculation.

CAC is a helpful metric for determining how costly and profitable growth is for your business. As most businesses already know, gaining customers through sales and marketing typically doesn’t come cheap. But armed with the knowledge of your CAC figures, you can implement effective CAC management and cut down on spending while also reaping as many benefits as possible from your efforts.

Without a good understanding of how much each customer is costing your business, it’s difficult to put your revenue into perspective and gain insight into future profitability.

Customer lifetime value (LTV) is important to consider alongside CAC because it provides long-term context. Businesses must be spending the right amount to pull in new customers without jeopardising the customer lifetime value and customer revenue, which can be tricky to do when you aren’t aware of the predicted revenue that each customer will generate after they’ve been acquired.

LTV can be calculated by multiplying the customer value by the average customer lifespan.

When working towards a good CAC figure, here are a few things your business can try:

• Offer user value: Use customer feedback to provide your customers with the things they want, whether that’s better customer service options or improved web usability. The more value that customers can get from you, the more likely they are to stick around and increase your LTV.

• Build better customer relationships: Building loyalty programs and offering excellent customer service can improve customer loyalty and retention rates, which boost LTV. 

• Introduce incentives: It can often be worth spending more on incentives like complementary products that your customers want. While this might increase your CAC, it should also improve your LTV in the long run and keep the ratio balanced.

• Invest in conversion rate optimisation (CRO): It should be as simple as possible to convert leads into paying customers. Optimise your website and ask for feedback on the usability to make sure you’re boosting CRO.