Customer Acquisition Cost (CAC)

February 1, 2023 2023-02-01 7:40

What is Customer Acquisition Cost (CAC)?

Customer acquisition cost (CAC) is the total cost of acquiring new customers for a business. This can be calculated by adding together the cost of marketing and sales activities, as well as any other associated costs, such as website development or customer service, marketing costs, sales team costs and sales pipeline development costs. The total cost is then divided by the number of new customers acquired. The result is the customer acquisition cost. 

The customer acquisition cost is an important metric for any business, as it represents the amount of money that must be spent in order to acquire new customers. This metric can be used to compare the efficiency of different marketing and sales activities, as well as to assess the overall profitability of the business.

What goes in calculating CAC (Customer Acquisition Cost)?

Here are four primary costs that are included while measuring the CAC for a business or product.

  1. Advertising and marketing expenses: When you try to capture a new market or willing to onboard new customers in your organization, budgets will be used in the online and offline advertisements, PR investments will be made, market research and promotional activities will also be done. So, these costs are used in calculating the CAC for the products.
  2. Sales and business development expenses: When your business generates a lead or a potential customer reaches out to you for your products, a sales cycle has to be executed. So, the efforts made to convert a lead to paying customers will be considered as sales and business development cost.
  3. Product development and related expenses: Developing new customized products and improving the services by doing R&D also counts in the customer acquisition costs for a company.
  4. 4. General and administrative expenses: To manage operations and develop business, all the administrative and salary expenses will be added to the cost to acquire a customer.

Customer Acquisition Cost (CAC) formula

CAC = (Total cost to acquire a customer)/Number of customers acquired

*total cost to acquire a customer might include dynamic and static investments a company would make in marketing, sales, product development, and servicing.

Characteristics of Customer Acquisition Cost (CAC)

Here are some of the important characteristics of customer acquisition costs:

  1. CAC can vary depending on the nature of a business and might come different even for the same niche.
  2. CAC is often a major driver of business profitability and lower CAC with higher LTV will help businesses drive growth..
  3. CAC is a key metric for assessing the effectiveness of marketing and sales efforts from a business.
  4. Customer acquisition cost is a one time investment you make to convert your lead to a paying customer, though it may be recurring in some cases. For instance, customer retention costs also play a role in the same.
  5. CAC is often a significant expense for some businesses in the B2B and B2C segment. It is important to carefully track and manage CAC levels.