Customer Acquisition Cost (CAC): How to Calculate CAC

Customer acquisition cost (CAC) is a business's total cost of obtaining a new paying customer over a specific period of time. A CAC calculation compares the amount of money a company spends attracting new customers with the number of customers the company actually acquires. Companies use this metric as a benchmark to calculate their profitability and determine whether their current business model is viable.

In a general sense, marketers and salespeople need to calculate their customer acquisition cost in order to tell if their customer acquisition strategy is worth the money they're spending. Below are additional reasons explaining why CAC is an important metric.

1. 1. CAC helps optimize your return on marketing expenses. When you reduce your business's cost of acquisition, you receive higher returns and more profit.
2. 2. CAC shows when you're spending money efficiently. When you have a low CAC, it typically means you're spending money in the right places. For example, say your CAC improves when you increase spending on inbound marketing efforts like blog content and decrease spending on paid advertisements. Now your marketing team knows that paid ads aren't generating quality leads and it's smarter to invest more of your marketing campaign budget into blog content and SEO.
3. 3. CAC helps you calculate your company value. Investors view CAC as one of the most important business metrics to project a company's potential growth. Startups focus on CAC optimization in order to obtain the best company valuation possible and attract more capital from investors.
4. 4. CAC improves with good customer retention. The less money you spend acquiring new customers, the more resources you can focus on retaining your current customer base. One of the major benefits of building long relationships with current customers is that loyal customers are much more likely to bring in new business through word of mouth. The biggest advantage of new business gained through word of mouth? It means you've spent zero dollars to acquire that customer, resulting in an even lower CAC.

You don't need advanced math skills to calculate CAC. Use the simple CAC formula below, where SC is total sales costs, MC is total marketing costs, and CA is the total number of new customers acquired within a certain period.

How you calculate your total sales and marketing costs will vary depending on your type of company. For example, an e-commerce startup will have different cost categories than an established SaaS company (software as a service). In general, sales and marketing costs may include: ad spend, marketing spend, technology costs (like CRM software), publishing costs, production costs, and sales team salaries (including commissions and bonuses).

Customer lifetime value (also known as LTV, CLV, or CLTV) is a metric that indicates the total amount of money a customer will spend with a company throughout their relationship with the company. In simpler terms, LTV provides a monetary value for how much a customer is worth to a company.

By looking at the LTV to CAC ratio, you can see how much money it's worth spending to acquire a customer. For example, it wouldn't make sense to spend $300 to acquire a new customer with a predicted LTV of only $100. An ideal LTV to CAC ratio is 3:1, meaning that a customer's lifetime value should be at least three times the cost to acquire them.

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