Customer Acquisition Cost

What is Customer Acquisition Cost?

Customer Acquisition Cost, or CAC, is one of the most important sales-related metrics. This KPI describes your company’s total costs in obtaining a new customer within a given timeframe.

There are many variants of CAC, each relevant for different situations, including initial, product, and customer CACs. CAC is often evaluated alongside other KPIs such as Lifetime Value (LTV) and Churn Rate.

CAC is an important metric for your sales, marketing and finance teams to follow.

Why is Customer Acquisition Cost important?

The importance of Customer Acquisition Cost lies in the fact it’s a measure of ROI (return on investment) for obtaining new customers. You can think of CAC as the ratio of sales and marketing expenses to the number of newly acquired customers. Sales and marketing expenses include ad spend, salaries, subscriptions for marketing tools, promotional materials, upgrade costs, and other related expenditures.

With this in mind, it’s important to know your CAC so you can reduce it while still maintaining – or even expanding – your customer base.

How to calculate Customer Acquisition Cost

Assume for the month of January your company spends €4000 on sales and €3000 on marketing, so €7000 total. You acquire 15 customers during the month, so your CAC is (€7000 / 15), or €467, spent to acquire one new customer.

How to reduce Customer Acquisition Cost

Customer Acquisition Cost will vary by industry, but the consistently held good ratio between CAC and LTV is 3:1. If your CAC exceeds your industry average, you can reduce it on two ends: by both optimizing your marketing process, and by giving your customers more.

Streamline your sales process and associated expenditures by having a deep and accurate understanding of your ICP’s needs and pain points. Tailor and target your advertising efforts to attract your ICP, which will save you both time and money.

On the other end, offer your customers more. Pay attention to their feedback, and optimize their user experience as much as possible. This will raise your customers’ value relative to your advertising costs to acquire them, and will help move your CAC:LTV ratio closer to the 3:1 ideal.

Other KPIs similar to Customer Acquisition Cost include:

• Average Revenue per User
• New MRR
• Sales Conversion Rate