Customer Acquisition Cost CAC
What is it? How to calculate it?
What is CAC?
Customer Acquisition Cost, or simply CAC, refers to the resources that a business must allocate (financial or otherwise) in order to acquire an additional customer. It includes every single effort necessary to introduce your products and services to potential customers, and then convince them to buy and become active customers.
Some common sales & marketing expenses are paid advertisement, sales and marketing staff salaries, CRM and marketing automation software licenses, events, sponsorships, gifts to customers, content production, social media and web site maintenance and more.
How to calculate CAC?
Conversion rates per sales funnel stage
One way to calculate CAC is to consider the three variables that compose it. This method allows you to go into detail and might give you good insights about your sales process cost and conversions but can be tricky to get right.
- CPL (Cost Per Lead) (e.g. marketing costs);
- Touch cost (e.g. sales staff salaries);
- Conversion rates at each stage of the sales process.
CAC = (CPL per customer + ‘touch’ costs per customer) * Conversion rate
Sales & Marketing expenses
An easier way to do it is summing all of your Sales & Marketing expenses and divide it by the number of customers acquired on a given period. So let’s say you’ve spent $1,000 this month on sales & marketing and have acquired 5 new customers. Your CAC would be $200, which means you’ve spent $200 to bring each new customer in.
CAC = Total Sales & Marketing expenses / # of New Customers
CAC and LTV
It’s important to notice that CAC is fairly meaningless without knowing the LTV (Customer Lifetime Value). That is, the ability to monetize a customer. And every company is different, so it isn’t a one-size-fits-all scenario; though generally, the more expensive the product, the higher the CAC will be.
CAC plays a major role in calculating the value of the customer to the company and the resulting return on investment (ROI) of acquisition. The calculation of customer valuation helps a company decide how much of its resources can be profitably spent on a particular customer. In general terms, it helps to decide the worth of the customer to the company.
The business challenge is to balance one against the other. Specific numbers are less important than the ratio between them. In any business model, the goal is to minimize CAC while maximizing LTV. The best SaaS businesses have a LTV to CAC ratio that is higher than 3, sometimes as high as 7 or 8.