Obtaining a new customer is nearly always good news. After all, you need clients for a functioning business. Without them, you’d lack the necessary cash inflows to support company operations. However, customer acquisition usually requires some monetary outlay in marketing and advertising, which dilutes the initial profit.
Calculating your customer acquisition cost (CAC) tells you exactly how much you spend on marketing and advertising to attract a new client. CAC is an essential metric to evaluate the health and efficiency of your customer acquisition strategies. Maintaining a CAC in line with your budget sustains business profitability.
Understanding the components of CAC
In digital advertising, calculating customer acquisition cost starts with identifying your total marketing expenses used to attract clients. Typically, customer acquisition expenses fall into several categories:
- Ad spend: The cost of running ads through your various marketing channels
- Employee wages: The amount paid to employees and contractors working on your advertising campaigns
- Technical costs: Expenses associated with any marketing software you use, such as email and SMS subscriber platforms or reporting tools.
- Creative & Production costs: Expenses used to produce ads, such as a camera to produce quality pictures for a print ad
- Inventory maintenance: The cost of maintaining your physical or digital product inventory, such as storage fees or product updates
Step-by-step breakdown of the CAC calculation
The general formula for how to calculate likely customer acquisition cost is:
CAC = Money spent on sales and marketing / Number of customers
To calculate it, follow these steps:
- Determine the time period for your evaluation.
- Add up your marketing and sales expenses.
- Divide the number of new customers acquired during the defined period by your total sales and marketing costs for that period.
Choosing the right time period for CAC calculation
The first step of calculating CAC is deciding on the time period for your calculations. The time period can be a month, a quarter, several quarters, a year, or even longer. You can evaluate your CAC over time by calculating several different periods and comparing the results.
For instance, say you want to compare your first quarter CAC to last year’s first quarter CAC. You could pull data from each time period to calculate the CAC and compare the results. If your most recent CAC drops compared to last year, your marketing strategies are becoming more efficient.
The CAC calculation process
There is a general formula for calculating CAC and several others that can be used for a more focused or in-depth evaluation. Here’s what you need to know about how to calculate the cost of customer acquisitions.
Standard customer acquisition cost formula
The standard customer acquisition cost formula is calculated as:
CAC = Total marketing and sales costs / Number of new customers over a period
So, let’s assume you’re calculating CAC for the quarter. You have $500,000 in marketing and sales costs and have acquired 1,000 new customers. Your CAC is $500, or $500,000 / 1,000.
Fully loaded customer acquisition cost formula
The fully loaded CAC formula includes additional expenses besides sales and marketing costs, such as:
- Overhead expenses like office space for marketing employees
- Legal services associated with marketing, such as advising on sales terms or creating customized contracts
- Discounts on products and services, especially for new customers
To calculate fully loaded customer acquisition costs, apply this formula:
Fully loaded CAC = All costs associated with customer acquisition / Number of new customers
The fully loaded CAC formula helps determine the scaling potential of your organization. It’s beneficial for investors and founders seeking to raise capital.
Paid customer acquisition cost formula
Paid CAC evaluates acquisition costs associated with paid ads and other paid marketing channels. It specifically excludes certain expenses, such as employee salaries and overhead expenses. Total acquired customers are limited to those obtained through paid mediums.
The formula for Paid CAC is:
Paid CAC = Marketing and sales expenses (less salaries and overhead costs) / Number of new customers obtained through paid channels
Let’s take an example. Assume you run a paid Google ad for one month, with a total expense of $5,000. Your paid ad results in 100 new customers. The paid CAC for your ad campaign is $50, or $5,000 / 100.
Calculating CAC for different business models
The CAC calculation can vary across business models. Here are some examples.
Example 1: CAC for a SaaS B2B organization
SaaS companies run on a subscription model, where customers pay a set fee over various intervals. Subscriptions may be monthly, quarterly, annually, or some other cycle. Here’s how to calculate customer acquisition cost for SaaS B2B customers:
CAC = Total marketing and sales costs for SaaS product / Number of customers who sign up for new SaaS product
Assume your marketing and sales costs for attracting new SaaS customers are $50,000 monthly. Over that timeframe, 200 new B2B customers sign up for your SaaS product, and your CAC is $250. You can apply the same formula for how to calculate customer acquisition cost for tech startups.
Example 2: CAC for a special event
Sometimes, companies use events like conferences or webinars to draw in new clients. An event is a great way to showcase your products, establish credibility, and connect with potential customers. Here’s how to calculate customer acquisition cost for events:
CAC = Total marketing and sales costs for the event / Number of clients who attend the event
Let’s say you host a webinar for your service business. You spend $5,000 to promote your webinar, which is available live and via recording for people who plan to watch it at a time convenient to them. The total number of attendees is 1,000. Your CAC is $5 for the webinar, or $5,000 / 1,000.
Example 3: CAC for a manufacturing company
Manufacturing companies create goods for resale or as components for other products. To calculate the CAC for a manufacturing company, use this formula:
CAC = Total marketing and sales costs for a product / Total new customers
Assume you run a tire manufacturing company. You produce a specific tire for SUVs, which you market to dealerships and car repair shops. Your total marketing expense for the tire is $10,000, and your total new business customers are 500. Your CAC is $20.
Lifetime value to CAC ratio
Hopefully, the first time a customer purchases with you won’t be the last. Some clients will become repeat customers and return again and again whenever they need something your organization offers. Thus, it’s useful to calculate their projected lifetime revenue with your company and compare it to CAC.
You can determine customer lifetime value (LTV) using a few components:
- Average purchase value: The average revenue of a sale in a specific period
- Purchase frequency: The number of times the average customer buys from you in a time period.
- Customer value: Calculated by multiplying average purchase value by purchase frequency
- Average customer lifespan: Length of time the average customer stays with your company
Once you have data for all four components, you can calculate lifetime value. The formula for LTV is customer value multiplied by the average customer lifetime. The result tells you how much revenue you can expect from each customer you acquire over the time they buy from you.
You can compare LTV to CAC as a ratio. For instance, assume you calculate $300 as your LTV and $150 as your customer acquisition cost. Your LTV to CAC is $300:$150, or 2:1. For every customer you acquire, you can expect an average profit of $150 — double your marketing investment.
Importance of LTV to CAC comparison for business health
Comparing LTV to CAC helps assess whether you’re recouping the cost of your marketing investment and by how much. The higher the ratio, the more efficient your marketing strategies are and the more revenue you generate from your client base. A low ratio like 1:1 indicates that the revenue you’ll earn from each new client just covers your marketing costs, which can lead to future solvency issues.
CAC and business metrics
It’s possible to examine CAC in many ways. You can subdivide it across multiple segments, time periods, and channels. Here are a few ideas for establishing a set of business metrics using CAC:
Channel metrics
- Advertising channels, such as online PPC ads vs. commercials
- Subchannels, such as Facebook vs. Instagram ads
- By advertising campaign
- Keywords used in PPC ads or content marketing
Segment metrics
- Profitability of an SMB versus an enterprise client
- Geographical, such as by city or country
- Specific product or service CACs
Industry benchmarks for CAC
How do you know if your CAC is satisfactory or needs work? The clearest answer can probably be found by comparing it to your LTV. The higher your LTV compared to your CAC, the more effectively you’re spending your marketing dollars.
You can use industry benchmarks for CAC and LTV and compare them to your own results. First Page Sage has an extensive set of industry CAC and LTV benchmarks, a few of which include the following:
If you find your CAC lags behind your target goals, take action to improve it. Here are a few ways to do so:
1. Analyze marketing data to optimize spending
You likely use a variety of platforms to advertise to your target audience. Monitor them closely to evaluate CAC on each one. For instance, you might calculate CAC for your PPC ads and again for email marketing messages. If you find one channel performs better than others, determine why. It may be more effective and cost-efficient to invest more in a high-performing CAC channel than a lesser one.
2. Use A/B testing to improve conversions
Sometimes, a slight tweak to your marketing message can make a big difference in conversions. Try testing different aspects of your advertisements to see if your changes impact results. For instance, you might switch subject lines on marketing emails or swap pictures in a social media post.
3. Get customer feedback
Your customers are your most valuable source of feedback. Ask them about their shopping and product experience whenever possible. Incorporate their comments into your product development and marketing efforts, and see whether that improves your LTV and CAC over time.
4. Use effective pricing strategies
Pricing products effectively is key to improving your CAC. If your prices are too low, it will be challenging to increase your CAC. Analyze your industry to determine whether your product pricing is reasonable. If it’s not, try adjusting your prices to raise your CAC.
Software solutions and tools for CAC calculation
Several different marketing software platforms include features to calculate CAC, among other metrics. Here are a few to consider for your organization.
- Google Analytics: Google Analytics offers a fully customizable web analytics platform for tracking CAC, conversions, clicks, mobile traffic, and other events. It’s entirely free to use and doesn’t require much effort to set up.
A customized Google Analytics dashboard with various marketing metrics. Image Source: Google Analytics
- HubSpot: HubSpot is a CRM platform that supports marketing and sales and offers extensive analytics. It’s ideal for large businesses with extensive marketing activities and campaigns to track.
- Salesforce: Salesforce is another CRM that supports marketing and sales activities. It includes functionality to track customer acquisition metrics like CAC and LTV.
- Constant Contact: Our CRM is an excellent option for SMBs who want a powerful marketing analytics platform that tracks CAC, LTV, and other key acquisition metrics.
Additional considerations in the context of CAC
The longer your customers stay with you, the more likely they are to purchase more than once. Lengthier customer retention times generally lead to a higher LTV, which is ideal for profitability. Remember that the higher your LTV to CAC ratio, the more efficiently you’re managing your marketing spend.
Sales costs are a component of CAC, just like marketing costs. In your CAC calculation, consider any sales expenses you incur, such as commissions, travel and entertainment, and networking costs.
Final thoughts and additional resources
Assessing your customer acquisition cost is essential to understanding how much money it takes to land a new customer. With that data, you can determine whether your spending is aligned with your budget and whether your marketing strategies are effective. As you continue your marketing journey, stay informed of the latest trends and practices with Constant Contact. Check out some of our other articles that can help you build a robust marketing campaign, like Using The Customer Journey Map to Personalize Email Marketing or How to Increase Average Order Value.
