Customer Acquisition Cost (CAC) is an essential marketing metric that allows businesses to understand how much sales and marketing budget they are spending for every new customer acquired.
With consumers being exposed to so many advertisements and branded content every day, it’s critical to invest in capturing your target customers' attention. Spend too little, and your target customers may do business with your competition. Spend too much, however, and revenue generated from new customers will not cover the cost of acquiring them.
By calculating CAC and comparing it with other important marketing metrics, such as Customer Lifetime Value (CLTV) and payback period, you can analyze the efficiency of your acquisition model and ensure you’re maximizing your customer acquisition investments.
To calculate Customer Acquisition Cost, divide your total sales and marketing spend for a given time period by the number of new customers acquired during that time period.
Total Sales & Marketing Cost
_______________________________ = Customer Acquisition Cost
Number of New Customers Acquired
For example, if your business spent $25,000 on sales and marketing in 2023, and acquired 1000 customers, your CAC for the year would be $25.
$25,000
______________ = $25
1000 customers
To calculate CAC accurately, it’s important to determine how you’ll define Total Sales & Marketing Cost. As a rule of thumb, it’s best to include all costs related to team member salaries, tools, and advertising fees to ensure your CAC accurately represents your acquisition model.
You can further hone your analysis by calculating the CAC of a particular part of your Sales and Marketing strategy. Paid CAC, for example, focuses exclusively on sales and marketing costs invested in paid marketing channels (such as PPC and display advertising), as well the salary and tool costs that support those channels.
Sales & Marketing Costs for Paid Channels
_________________________________________________ = Paid CAC
Number of New Customers Acquired through Paid Channels
Blended CAC, on the other hand, focuses on costs for all marketing and sales channels–paid channels as well as those that aren’t paid, such as content marketing.
Total Sales & Marketing Cost
________________________________ = Blended CAC
Number of New Customers Acquired
It’s valuable to analyze both Paid CAC and Blended CAC to understand how efficiently your paid programs are acquiring new customers, and whether you could be doing more to acquire customers through non-paid channels.
It’s important to invest the right amount of budget in acquiring new customers. Invest too little, and target customers may do business with your competitors instead. But invest too much, and your acquisition model may become unsustainable.
Different types of businesses will have very different customer acquisition models. A car manufacturer, for example, may be willing to invest thousands of dollars in acquiring a new customer, as they know that once a new customer makes their first purchase it will generate tens of thousands of dollars in revenue. A company that sells coffee mugs, on the other hand, will aim to have a lower customer acquisition cost.
To understand what a good Customer Acquisition Cost looks like for your business, it’s helpful to evaluate CAC alongside two additional metrics: Customer Lifetime Value (CLTV) and payback period.
Customer Lifetime Value (CLTV) is defined as the total revenue that a customer generates for your business over a given period of time. Revenue can be generated by a single purchase, or by numerous purchases or subscription payments throughout the time period.
Analyzing CLTV alongside CAC is very helpful as it helps you understand the profitability of your customer acquisition model. When you’ve made an investment in acquiring a customer, for example by attracting them with an advertisement on Facebook, that customer initially has negative value to your business. Once they make a purchase, their CLTV increases to the purchase amount and they begin to become more valuable.
When CLTV is equal to CAC, customers are generating the same amount of revenue it cost to acquire them, on average. As customers make more purchases or subscription payments over time, CLTV will increase further, ideally surpassing CAC and making your acquisition model more profitable.
Driving CLTV above CAC is important for ensuring your business is growing sustainably. While many sources suggest that a healthy CLTV:CAC ratio is 3:1, research shows that average CLTV:CAC does vary across industries. While eCommerce brands had an average CLTV to CAC ratio of 3:1 in 2023,Commercial Insurance brands achieved an average CLTV:CAC of 5:1. To learn more about where your business should be aiming, see CLTV:CAC benchmarks for your industry here.
Analyzing your CLTV:CAC ratio is critical for understanding how much revenue a customer will generate after you invest in acquiring them. But while profitability is important, so is cash flow. A customer that becomes profitable to your business in 6 months is much more valuable than one that becomes profitable in 6 years. This is where CAC payback period comes in.
Payback period is the amount of time it takes for a newly acquired customer to generate the same amount of revenue it cost to acquire them. In other words, the amount of time it takes for CLTV to equal CAC.
Payback period is important because once customers become profitable, the profits they generate can be reinvested into further business growth. Short payback periods lead to compounding growth over time, while long payback periods lead to stagnation.
To calculate payback period, divide your CAC by your gross profit.
Customer Acquisition Cost
____________________________ = Payback period
Monthly Revenue x Gross Margin
When making this calculation, note that you must factor the cost of goods sold (Gross Margin) into monthly revenue, as you are analyzing for profitability.
As with CLTV to CAC, payback period can vary depending on industry and maturity stage. While consumer businesses should aim for a payback period between 1-6 months, B2B companies can aim for a payback period between 6-12 months, and even longer if they’re focused on selling to enterprise brands.
Mature companies that have a highly predictable CLTV and strong retention may be willing to tolerate a higher payback period, as they have greater certainty that customers will pay them back within the payback period (and likely more cash in the bank).
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