Customer Acquisition Cost (CAC)

CAC stands for customer acquisition cost. CAC is the total sales and marketing cost to earn a new customer over a specific period of time. Sales and marketing cost includes the following:

  • marketing spend

  • marketing and sales salaries

  • incentives

  • bonuses

  • other overhead costs

Typically most businesses focus on reducing their CAC. This is not just to regain revenue but to improve the health of a wide variety of campaigns that their sales, marketing and customer success teams run.

What is Customer Acquisition Cost (CAC)?

Customer Acquisition Cost (CAC) is the measurement of the total marketing and sales cost to earn a new customer in a specific time period. This metric is used to determine profits as it compares the total amount of money spent to acquire a new customer against the total number of customers gained in the same time period.

How to Calculate Customer Acquisition Cost?

Customer acquisition cost by using this formula:

          CAC = Cost of Sales and Marketing/Number of New Customers Acquired.

Typically, reducing CAC ensures that the business is spending money more efficiently to see an increase in the total profit generated in a specific time period.

For example: Let us consider a customer relationship software company that spends a total of $40,000 on a specific marketing campaign to generate leads. After the completion of this campaign, the company sees a total of 1600 new customers subscribed for their product or service. However, the company needs to spend an extra $60,000 on other costs (ad spend and other production costs) for these new customers.

The CAC for this company can be calculated as follows:

CAC = ($60,000+$40,000)/1600 = $100000/1600 = $62.5

This indicates that the company needs to spend a total of $62.5 to acquire a new customer.

Types of Costs to Include in a CAC Formula

Below are some of the expenses that should be included when calculating for this metric.

  1. Ad Spend

This is the money spent on advertisements which are a great way to attract new customers. For these ads to work, your ad campaigns should connect with your target audience and should provide you with a good return on your campaigns. It can be calculated by dividing the revenue that's produced by the ad by the total amount of money you spent on that campaign.

  1. Employee Salaries

A company is as good as its employees. To ensure you hire quality employees you need to ensure you have enough set aside to pay quality salaries. If the total salaries paid is high then there are other ways to combat it. Rather than employing pay cuts and layoffs, ensure your marketing automation software is doing its job so that it can improve your team's productivity.

  1. Creative Costs

Creative costs are what your teams spend on creating and curating content. This could be money spent on hiring the right talent to promote your company and its products and services, or it could be what your team spends on lunch when having a team meeting and more. All of these cost factors fall under creative costs.

  1. Technical Costs

Technical costs refer to the technology stack that your marketing and sales team use. For example, it could be the CRM you employ, or a marketing automation tool you require to improve productivity, etc.

  1. Publishing Costs

Publishing costs involve the amount spent on launching your marketing campaigns to the public. This includes the amount spent on paid social media ads, or ads in a newspaper or magazine and even ads on TV.

  1. Production Costs

Production costs are the costs associated with visually creating content for your campaigns. For example, if you're making a video, you need a camera, a proper set, personnel to edit the video, and more. If you outsource this to a third party then the costs increase. Always consider your options to see whether producing content in-house is better than outsourcing.

  1. Product Upkeep

These are costs associated with maintaining and improving your products or services. If you are a SaaS business, then this involves the amount spent on optimizing your software so that your existing and potential customers get a bang for their buck.

Wrapping Up

Only when you understand how much it costs to onboard a new customer can you make data driven decisions. With a proper grasp on your CAC, you can make predictions of how profitable your business will be not just for the current quarter but also in the long run.

So spend some time to understand what your customer acquisitions costs are and see how to optimize it to increase your overall profitability.