Customer Acquisition Cost or CAC is a key marketing and sales KPI that everyone in the space should know like the back of their hand. It is a comprehensive indicator of the effectiveness of your sales and marketing efforts and offers key insights into the health of your business.
What is Customer Acquisition Cost?
CAC is the total cost spent on acquiring a new customer. This number can be different across different industries. eCommerce businesses may only include marketing spend while larger SaaS organizations may also need to factor in the time spent by their sales team guiding the prospect through the sales journey.
How is Customer Acquisition Cost Calculated?
First thing first, you want to lay out what you would like to calculate CAC for? Are you interested in the CAC of a specific marketing campaign? Are you curious about the CAC for the business as a whole? Is there a certain time period’s CAC you’re curious about?
The simplest of Customer Acquisition Cost equations (shown below) takes the total acquisition costs divided by the number of new customers in the same time period.
Simple Customer Acquisition Cost Example
For example, an eCommerce business spent $1,000 dollars on a Google Ads campaign for their Black Friday sale. They are only curious about the costs associated with this specific campaign. During their Black Friday campaign there were 10 purchases from new customers. Their marketing spend for this campaign is $1,000 dollars and the customers acquired is 10. Plugging that into the equation: $1,000 spend / 10 customers acquired = $100 CAC.
More complex businesses can include other costs in their equation. These additional costs could include the time spent by the marketing team developing the campaign, the time spent by the sales team to move the client through the sales process, and any additional expenses incurred along the way.
Why is Customer Acquisition Cost important?
CAC can be an early indicator of something going wrong in one of your funnels. Young businesses are more likely to have a higher CAC because they do not have the brand awareness or recognition of established businesses.
Companies need to spend money to gain new customers. This spend includes marketing and sales efforts. Determining the company CAC, they can create a ballpark number for what they are going to spend to acquire these customers. If the CAC is too high relative to the money generated by these customers, the business model may be flawed.
Take our eCommerce business as an example. If that campaign was for a product that cost $500 and their CAC was $100 dollars that campaign had a 400% ROI. This company recouped 4 times the amount of money they invested.
On the flip side, if their product costs $50, the company lost 500$. One of these campaigns is worth continuing, the other should be paused, and the team should head back to the drawing board.
Reducing Customer Acquisition Costs
There are multiple areas companies looking to reduce their CAC should look at.
Firstly, the sales funnel. Ask yourself these questions:
Is my team targeting the right people?
High CAC can be a result of low conversion rates and spending money on the wrong prospects.
Low conversion rates
Low conversion rates hurt in 2 ways. 1. You lost out on the potential revenue from the deal and 2. The money used to acquire the lead is now wasted. Increasing your win rate should be the first step towards lowering your CAC. The process of boosting win rates starts with proper deal management.
Targeting the wrong people
Targeting the wrong people can lead to a skyrocketing CAC. Spending ad dollars and sellers time on people who ultimately fall outside of your ICP will cause CAC to grow. Your product or service should only be targeting people who are suffering from the problem that your product or service solves. Don’t waste your time and money throwing stuff at the wall and seeing what sticks. Identify your target market and hone in on these people.
Marketing spend and CAC go hand in hand. Every dollar spent on marketing should be tied to a CAC. If you are looking to reduce your CAC looks through your marketing campaigns and pause any low performers. Use that spend to double down on your most successful campaigns. Continuously analyzing and optimizing ad campaigns will overtime reduce your CAC.
What is a good Customer Acquisition Cost?
A good CAC isn’t a universal number. However, generally speaking revenue generation should be at minimum 3x your CAC. Meaning, in our eCommerce example, the product being sold during that campaign should be 3 times the CAC or at least $300.