Customer acquisition cost (CAC)

What is customer acquisition cost (CAC)?

A company’s customer acquisition cost, or CAC, represents everything a company spends on attracting new customers or convincing a prospect to make a purchase. At the most basic level, it is the total cost of all its sales and marketing expenses divided by the number of new customers acquired. 

There are three broad categories of sales and marketing expenses included in CAC:

• Sales and marketing staff includes salaries, benefits, commissions, and bonuses of the people involved in bringing in new business. 

• Hardware and software includes subscription fees for SaaS platforms such as customer relationship management platforms, customer data platforms, website hosting platforms, and analytics tools used to report website metrics.

• Advertising and marketing campaigns include both paid advertising and the cost of internal marketing activities such as a design agency, SEO agency, the production of printed materials or promotional videos, and expenses related to trade shows and account-based marketing.

Some companies also include product-related costs in their CAC calculations. For companies that sell products, this includes inventory storage and maintenance. For software companies, this includes updates and patches that maintain functionality.

CAC is always calculated over a specific period — usually quarterly or annually. 

Customer acquisition cost vs. customer lifetime value

Customer acquisition cost is related to customer lifetime value (CLV), also known as total lifetime value (TLV). This measures the total revenue a customer generates during their entire relationship with a company or brand.

There are several factors that go into determining CLV:

• Average purchase value - A company’s total revenue divided by the number of purchases made during the same period.

• Average purchase frequency - The number of individual sales divided by the number of unique purchasers. A single customer making multiple purchases of the same item will yield a higher average purchase frequency than multiple customers making the same number of purchases.

• Average customer value - The purchase price multiplied by average purchase frequency.

• Average customer lifespan - The average amount of time customers continue to make purchases.

Multiplying average customer value by average customer lifespan provides an estimate of the revenue generated from an average customer during their relationship with a company. The ratio of CLV to CAC compares how valuable a customer is to how much money spent to acquire them. It’s therefore a quick way to estimate potential profitability.

When a company launches a new product, it might make sense for CAC to exceed CLV. Over time, however, the goal is to widen the gap between CAC and CLV. In general, the wider that gap is, the higher the potential for profitability. 

Average customer acquisition cost and CAC-to-CLV ratio (CAC:CLV) rarely remains constant. Depending on the industry, variables like seasonality or supply chain issues, and macroeconomic factors like the unemployment rate or trade balances, can all affect CAC.

Why are customer acquisition cost and customer lifetime value important?

CAC and CLV help companies understand the ROI of their marketing efforts. These metrics also help organizations improve their product profitability and overall profit margins. 

Specifically, comparing CAC to LTV helps companies:

• Manage expenses by ensuring they spend less on acquiring new customers than the revenue those customers generate.

• Chart how fast they are growing by calculating how much time it takes to recover CAC through revenue captured by a particular campaign.

• Forecast finances and set realistic budgets, KPIs, and goals.

• Decide whether to expand the business if the CAC:CLV is favorable.

• Analyze how churn rate eats into overall CLV and decide how much to spend on reducing churn.

• Determine the success of their sales, marketing, and customer service programs and understand where changes are needed.

• Raise investment capital by demonstrating a favorable CAC:CLV.

Which roles monitor CAC and CLV?

Customer acquisition cost and customer lifetime value are usually calculated and monitored by the head of a company’s marketing organization. Because CAC is an overarching measurement of the efficiency of sales and marketing operations, it is typically shared with the CEO and CFO as well as the heads of sales, growth/performance marketing, revenue generation, sales operations, demand generation, and any other team member involved in setting sales and marketing strategies.

How to calculate customer acquisition cost

The standard customer acquisition cost formula divides total sales and marketing expenses by the number of customers acquired in a given period.

There are a few important factors to keep in mind when calculating CAC: 

• CAC can be calculated monthly, quarterly, and annually. 

• Whatever time period is analyzed, the calculation must always compare equal time periods. 

• The calculation must also define the variables similarly from period to period. 

Because CAC calculates costs related to customer acquisition rather than customer retention, customer service and/or account management costs are usually not included unless they are a significant source of upsells or new business.

Types of customer acquisition costs

Total customer acquisition cost is a broad measurement that can be segmented in many ways to determine the costs associated with a specific part of the sales and marketing cycle.

• Organizations can segment by size, demographic, market, or budget to understand the cost of acquiring a specific type of customer.

• If a company sells multiple products, or different versions of the same product, they can hone in on the CAC for a specific product type.

• Teams can also analyze the cost of acquisition via a particular marketing channel separate from other sales and marketing activities.

• CAC can be calculated for new customers, renewing customers, and reactivated post-churn customers.

By understanding CAC at a more granular level, organizations can make finer adjustments to the variable sales and marketing spend.

Cost per acquisition vs. customer acquisition cost

Cost per acquisition, or CPA, measures marketing spend differently. There are two types of CPA:

• In digital and performance marketing, CPA refers to how much it costs to get a potential customer to take a specific action, such as clicking on a link or downloading a piece of content. This measurement is important in digital advertising, where costs are often determined by number of click-throughs. And by adding together the CPAs along the customer journey, marketers understand the total cost of moving a prospect through the sales funnel.

• CPA is used by brick-and-mortar transactional businesses like restaurants or grocery stores that offer many items to purchase and may also have a large number of one-time customers. Calculating the cost per acquisition — or each individual menu item or product in the grocery store — enables organizations to understand how much it costs to sell a specific item.

What factors influence customer acquisition cost?

A successful marketing strategy generally involves reducing CAC. However, marketers have to shape their strategies around certain factors that cannot be changed. Among those are:

• Competition - Selling into highly competitive industries or verticals will likely raise CAC, as will selling products in a crowded market.

• Length of the sales cycle - Enterprise SaaS platforms with a long sales cycle, for example, will generally have a higher CAC than inexpensive apps you can download to your phone.

• Brand awareness - Mature brands generally spend less on demand generation than new ones.

• Customer lifespan - Finding new customers often costs more than keeping existing ones, so products with contract-based annualized revenues or subscription revenues often have lower CACs than single-purchase products.

• Company stage - The annual marketing spend for startups often exceeds their annual revenues, driving CAC up; that ratio is usually reversed for well-established companies.

• Company priorities - Whether a company’s goal is growth, profitability, acquisition, or a combination thereof affects the choices they make about CAC.

Examples of customer acquisition cost calculations

Below are some examples of how organizations can calculate CAC in different industries. 

Sports

The CMO of a football team needs to determine the CAC for its local fan base per season. 

First, the CMO adds the costs of cross-promotions with various sports merchandise retailers, ads on local TV stations, social media advertising, and sales/marketing team people costs. The CMO then divides that sum by the total number of home-game tickets sold. 

Retail

A dress designer launching their first collection totals up the cost of printing flyers, online advertising, and hiring a social media marketing agency. The designer divides the sum by the number of customers who bought one or more dresses during the month of Fashion Week. In this way, the designer determines his CAC for that month. 

Media and entertainment

A streaming service launches a campaign to acquire new customers ahead of a new season release for a popular show. The campaign will last one quarter. 

First, the organization would add up all marketing costs (including marketing team salaries, advertising costs, and social media influencer partnerships) and sales team costs (salaries and commissions), if applicable. Then, they would divide the total sales and marketing costs by the number of new customers who signed up during the campaign.

What is the ideal CAC benchmark?

CAC by industry

Because CAC differs by industry, it’s difficult to set an ideal customer acquisition cost benchmark. Nonetheless, a report by FirstPageSage shows certain broad trends in B2B marketing. 

According to the report, higher education, real estate, financial and legal services, heavy manufacturing, and software development run the highest CACs. Pharmaceuticals, eCommerce, SaaS platforms and entertainment run the lowest. The CAC for financial services is, on average, more than three times the CAC for SaaS. 

The report also shows that among B2B SaaS companies, those whose platforms serve the financial, insurance, medical, and hospitality industries have the highest CACs. Platforms used for eCommerce as well as for legal and HR functions run the lowest. For example, the CAC for fintech platforms is on average 3.5 times higher than the CAC for HR platforms. 

CLV:CAC

Because the CAC by industry varies, the ratio of customer lifetime value to customer acquisition cost, or CLV:CAC, is a more useful measure of value or success. In general, companies prioritizing profitability aim for a CLV:CAC ratio of 3:1 or higher. In other words, companies should earn three times as much from each customer as they spend acquiring that customer to maintain healthy growth and profitability.

How to reduce customer acquisition cost

Improving CAC means optimizing your marketing efforts so you can attract the most customers with the lowest marketing spend. 

Marketing channels and pricing

Marketers have the most control over formats and channels they use to advertise their product and generate brand awareness, and the price they set for their products. Carefully monitoring the costs and payoffs of each helps marketers reduce CAC.  

• Across all industries, account-based marketing and radio and TV advertising generate higher CACs than content marketing, email marketing, and social media marketing.

• Paid advertising is usually more expensive than organic social media marketing, but can provide a more targeted audience likely to purchase.

• Advertising costs vary by market, region, country, city, and medium. TV advertising and billboards that reach a broad audience are usually more costly than digital ads on Google, for example.

• Outbound cold calls may be less costly than a content marketing strategy that relies on a long-term strategic SEO play.

• A calibrated inbound lead strategy may cost less than paid advertising that generates more leads but fewer qualified leads. 

Product and brand quality

Another factor is customer service and product quality. While these elements are usually beyond the purview of the sales and marketing teams, a product that delivers as advertised and is backed by proficient, accessible customer support generates customer loyalty, increasing CLV. Satisfied customers are often the best brand ambassadors. Positive case studies and customer referrals are less expensive ways to lower CAC than programmatic marketing campaigns.

Reducing CAC through accurate data-driven targeting

Accurately targeting your marketing efforts and retargeting potential customers will help improve your lead quality, conversion rates, and customer retention, enabling you to reduce your customer acquisition costs. 

1. Lead quality - By studying historical data about which leads have converted to paying customers and which paying customers spend the most money or make purchases most frequently, marketers adjust their lead-generation strategies and lead qualifying criteria. High-quality leads not only help lower CAC by shortening the sales cycle, they can also increase CLV.

2. Conversion rate - To turn more prospects into leads and more leads into customers, marketers analyze website data and track customer and buyer journeys. A/B testing of CTAs, navigation, and ad targeting can improve conversion rates. Measuring organic inbound traffic, time on page, and gated downloads can inform decisions about content marketing and SEO.

3. Customer retention - In general, it costs less to keep a customer than to find a new one. Data-driven customer loyalty programs that reward repeat purchases, referrals to new customers, or incentives to inactive customers are three popular tactics for reducing churn and increasing repeat business.

The more you know your ideal customers and the more accurate your customer personas and customer segmentation models, the better you’ll be able to focus your efforts efficiently and profitably, market to people, and market through channels that provide the best ROI.

Knowledge about your prospects’ and customers’ behaviors, preferences, and motivations begins with collecting accurate and comprehensive customer data, and storing that data in a single, secure location. Such targeting efforts can get a boost from software such as composable customer data platforms that enable you to activate the customer data in your data warehouse and use it for customer journey orchestration and to make data-informed choices about marketing content and channels.