Customer acquisition cost (CAC) just might be the most headline-making metric of the last decade. Big tech, a supply and demand problem in advertising, an increasingly complicated customer journey, online privacy concerns, and a glut of competition have led to staggeringly high CAC increases that just don’t seem to slow down.
It can feel as though you are at the mercy of big tech and that lowering or even simply controlling your CAC is impossible. But that is not necessarily the case. Many businesses have managed to successfully reduce their CAC by focusing on it, testing, learning, and continuously optimizing.
In this guide, we’ll revisit the basics with a modern-day lens, before diving into tips for improving your CAC in a sustainable way.
What is customer acquisition cost (CAC)?
Your CAC is the total cost your company pays to acquire a new paying customer. It accounts for everything that goes into acquiring that customer including the cost of your marketing and sales team, any creative or production costs associated with advertisements, and the cost of advertising itself.
A business’s CAC will be lower or higher depending on the complexity of acquiring a new customer. For example, it is typically much harder and more expensive to target and acquire a new B2B customer than it is a new ecommerce customer. Even if we removed the cost of advertising from the equation, the simple fact of more time spent means your CAC would be higher. This is not necessarily a problem, the B2B customer may sign up for an annual contract and spend a significant amount of money with the company, whereas the ecommerce customer could make one small purchase, only to never appear again.
With this example, you can see how CAC, as a standalone metric, only tells part of the story. To truly understand the role your CAC plays in the health of your business overall, you need to dig a little deeper.
How to calculate your customer acquisition cost (CAC)
The hard part here is not the calculation, but generating an accurate sum of all the go-to-market costs you’ve accumulated. Ensure you comb through your budgets and account for team costs, advertising, content or creative production, agencies you work with (e.g. SEO), pay-per-click campaigns, taxes, recruiting, sales team costs including commissions or bonuses, travel expenses, and any other overhead costs like wining and dining your customers.
Once you’ve identified what your acquisition costs are, calculating your CAC is as simple as dividing that total acquisition cost by the number of customers you acquire.
So if a business spends $25,000 in a quarter on sales and marketing, and acquires 100 new customers in that time, their CAC would be $250.
Variations on CAC
Sometimes it will be necessary to look at different variations on CAC to get a more nuanced view of what’s going on. Some CAC variations include:
Marketing CAC: Take only the costs associated with marketing and divide by the number of customers acquired through marketing activities to measure the efficiency of the team.
Sales CAC: As above, but look at only the sales costs and divide that by the number of customers acquired through your sales team’s efforts to measure the team's effectiveness.
Advertising CAC: Take your total ad spend in a given period of time or with a specific platform, and divide it by the total number of customers won. This can be helpful to identify whether you need to make changes to the platforms you’re advertising.
CAC per marketing channel: Identify the expenses accumulated for each channel, for example, organic search or paid search, and the number of customers acquired from those channels. With these two things, you can use the standard CAC equation to calculate the CAC per marketing channel and weigh up which channels are performing best.
LTV:CAC ratio: This is a far better indicator of your business’s health than CAC alone. To calculate it, you will want to look at your customer’s lifetime value (LTV) compared to the CAC and identify the ratio. For example, if a financial advisory company has an LTV of $45,000 and their CAC is $10,000, we’re looking at a ratio of 1:4.5. A $10k CAC may seem high, but given a ratio of 1:3 and above is considered strong, this fictitious business is doing well.
CAC payback period: This is the time it takes for a customer to pay back the acquisition cost. For example, if a SaaS spends $50 on acquiring a customer and they charge $25 a month, the CAC payback would be two months.
5 tips for improving your CAC
To improve your CAC you need to decrease costs or increase the number of customers you’re acquiring. It’s a worthy cause, and it is possible to achieve a reduced CAC with a concentrated effort. However being too blinkered in your approach can lead to an increase in low-quality or high-churn customers, which negatively impacts your LTV:CAC ratio and return on investment. That outcome can be more dangerous than a slightly higher CAC to begin with.
There are two other metrics that could be wreaking havoc on your CAC; cost per acquisition (CPA) and lead-to-customer conversion rate. Your CPA is the amount of money you spend to acquire a new lead and your lead-to-customer conversion rate shows you the proportion of qualified leads that turn into paying customers.
If you are spending a lot to acquire a new lead, and only a small percentage of those leads actually turn into customers, your CPC is going to be sky-high. So before you look into your customer acquisition, consider the role your leads are playing.
If your CPA is too high, it could be down to a few things:
The channels you’re advertising on
Your audience targeting
Your messaging and creative are not resonating with the target audience
If your lead-to-conversion rate is suffering, you could have a lead quality problem on your hands. If that’s the case:
Is your ideal customer profile (ICP) still relevant?
If you are spending a large amount of time and money on retargeting campaigns that keep your brand top-of-mind for new leads, consider how you could nurture more leads organically with email, SMS, pop-ups or push notifications.
One of the best places to start is an email nurture campaign. When your new lead is acquired, they’ll be entered into the campaign and sent a series of emails that educates them on the problem your business solves and your product or service.
Nurture journeys typically include helpful content that provides value to your lead and keeps them engaging with your content, as well as more product-focused messaging or even offers that nudge them further down the funnel.
The more you can personalize the journey, the better. Consider splitting journeys based on the lead’s industry or needs, or depending on which of the earlier emails they open and click.
3. Create a product that sells itself
Whether you’re a SaaS operating in a product-led growth model or not, it’s worth considering how some of the philosophies of a product-led growth strategy could benefit your business. For example, if your sales team is spending a lot of time doing demonstrations that could easily be accessed by a video or interactive tutorial, the upfront cost of producing such an asset could quickly be absorbed by the time saved on your sales team’s side.
On the other end of the customer lifecycle, creating a product that customers want to share with their network can create a growth loop that ultimately drives your CAC in the right direction. Consider how you can create more advocates and incentivize them with a referral program to bring a higher volume of customers in organically.
4. Try new channels and partnerships
Big tech has more advertisers than it does impressions, it’s part of what drives the CPA up. But big tech isn’t the only place to advertise. Consider how you could re-invest part of your budget for new and emerging or independent platforms that align with your company’s niche or partner up with a like-minded (but not competitive) business to reach a new audience.
So long as you are being careful to match the channel to your ICP, exploring these new channels can help you bring in more leads who turn into customers, at a lower cost.
Not every experiment is going to work, so put a cap on the total experimentation budget, optimize at every turn, and lean into what’s performing.
5. Use lookalike audiences
Targeting people who look like your best existing customers is a great way to minimize the dead leads you’re paying for, and maximize the number of customers you bring in.
Building a lookalike audience starts with a source audience that the advertising platform (e.g. Google or Meta) will use to identify and target individuals with similar attributes and habits. The more targeted and accurate your source audience, the better your lead quality will be so it’s important for your source audience to include only those customers who have a higher LTV.
Since this is an audience you already know a lot about and serve, you have a golden opportunity to create highly relevant advertising creative that clearly and quickly explains the problem your product or service solves for them.
Lookalike audiences take the guesswork out of targeting and — when used correctly — can help you lower your CAC and improve your LTV:CAC ratio.
Customer acquisition cost (CAC) as a standalone metric only tells a part of the story and, in many cases, can be incredibly misleading. But when paired with metrics like LTV or payback period, or when being used to measure the performance of different marketing channels, it plays an important role in assessing the health of your business.