How to Calculate and Optimize CAC ( Customer Acquisition Cost) ?
How to Calculate and Optimize CAC ( Customer Acquisition Cost) ?
By understanding how much it costs to acquire new customers and tracking the return on investment (ROI) from these efforts, you can make more informed decisions when it comes to marketing budget.
Index of this article below
What is CAC and formula?
Which costs are involved in the CAC formula?
Best approach for CAC ?
Impact of attribution models on CAC
Example scenario for Company A: CAC Calculation
Final Reflections on CAC calculation
1. What is CAC?
Let's start by defining CAC; it is in short customer acquisition cost, which is all about businesses' resources and efforts to gain new paying users. This is the standard customer acquisition cost formula used by most companies:
Calculating Customer Acquisition Cost (CAC) is simply an equation: dividing the marketing and sales expenses incurred over a specific period (e.g., a month, a quarter, or a year) by the number of customers gained. It's a powerful way to measure the effectiveness of your customer acquisition and make informed decisions for your growth strategy.
It’s essential to understand which costs are involved in this equation. These can include advertising, sales staff salaries, marketing teams' sizes, or other expenses related to acquiring customers.
Once you have determined the CAC formula above, it is also essential to measure the conversion rate of customers (Conversion rate is the percentage of website visitors that complete a desired action, such as sign-up, purchasing, or paying a subscription. This helps determine if marketing efforts lead to actual conversions instead of just bringing in traffic.
2. Which costs are involved in the CAC formula?
Usually, marketers simplify this metric only to include paid advertisement efforts, but there are different angles to take into in terms of the costs included in the formula, such as the ones shown in the table below:
When to use which one? Creating a more realistic CAC formula is a case-by-case decision since every business has different goals. Remember that industry-specific factors can influence customer acquisition costs, so it's important to find what works for your company e.g. If you are a founder, you might want to have a greater overview of the costs involved; if that's the case, I would suggest using the Fully Loaded CAC formula, which will allow you to take a closer look at your path to profitability.
3. How to approach CAC for your company?
To get started, I would suggest looking at your sales and marketing strategy, such as how you plan to allocate the budget for acquisition channels. Consider also the following as part of your approach to CAC:
Optimize CAC by leveraging SEO, social media, and content marketing channels. These tactics increase ROI and reduce customer acquisition costs in the long term.
Customer retention is equally critical. Invest resources in building strong relationships with existing customers to reduce churn rates and create loyal advocates. Strategies like loyalty programs, surveys, or personalized offers drive customer loyalty and engagement.
Understanding customer acquisition costs maximizes long-term ROI. Considering all the mentioned elements with a comprehensive CAC formula will optimize your acquisition and create a successful business model.
4. How Attribution Models Impact CAC?
Attribution models measure how different marketing activities contribute to a sale or conversion and help marketers understand which strategies significantly impact their bottom line. Multiple types of attribution models are available, and understanding what works best for your company will help you attribute sales more accurately and identify the most effective customer acquisition strategies.
Measuring your conversion rate to determine your CAC initiatives' success is also relevant. Tracking the number of new customer sign-ups and how many convert into paying customers will help you better understand whether your acquisition efforts lead to actual sales. Amplitude's multi-attribution model is worth exploring. It considers multiple factors regarding CAC, such as customer lifetime value (LTV).
Regarding customer acquisition costs, it is essential to remember that the key is acquiring as many customers as possible and focusing on acquiring valuable ones. Those who will likely stay with your business long-term and generate repeat purchases.
With careful analysis, you can use the CAC metric to help inform decisions around product pricing, marketing budget allocation, and more – all of which will increase your ROI eventually, which these days is critical for founders.
5. Example scenario for Company A: CAC Calculation
Let's consider Company A in a given month:
$20,000 Spent on sales and marketing efforts
Acquired 200 new customers over a year
In this case, the CAC would be $20,000/200 = $100 per customer. This simple calculation allows Company A to understand that, on average, they spend $100 to acquire a new customer. Company A can determine whether its acquisition strategy works by comparing this CAC to the average revenue per customer.
If they find that the
»If CAC is higher than the average revenue per customer, then it may be time to review spending and consider other sales and marketing strategies.
» if CAC is lower than their average revenue per customer, then the acquisition strategy is likely working and can be further refined to increase the return on investment.
Company A can then use this information to evaluate how their customer acquisition efforts are performing over time.
»Compare the CAC from different marketing channels, such as organic search, paid search, or social media, and identify which channel was most cost-effective.
» Compare Channel CAC with metrics like customer lifetime value (LTV) to understand which channels are driving long-term value for their business.
6. Conclusions on CAC
Calculating CAC can also help you understand when it may be the best time to invest more in customer acquisition: If your company is running low on customers, then now may be an excellent time to ramp up your marketing efforts and increase spending as necessary.
Conversely, lowering your CAC and focusing on retaining your users or launching a referral program might be wise if you have good user numbers.
To assess the Customer Acquisition Cost (CAC) performance you need to do it about LTV. It assists in identifying potential areas for improvement and the actual profitability of the business.
Comparing CAC across different channels—It's essential to identify which channels are most effective in terms of CAC. This can help you decide where to invest more resources and time while keeping track of the return on investment (ROI).
Establishing customer acquisition goals—Knowing your CAC helps set achievable customer acquisition goals. This will also keep your sales and marketing teams accountable for their efforts and provide incentives to increase customer acquisition while keeping CAC low.
Utilizing A/B testing A/B testing helps you measure the effectiveness of different marketing efforts, providing valuable insights into which tactics are working and which need to be optimized or dropped altogether. This can help you improve both your CAC and ROI over time.
By understanding how much it costs to acquire new customers and tracking the return on investment (ROI) from these efforts, you can make more informed decisions regarding marketing budget allocations and improve your overall customer acquisition strategy.
About the author:
Dayana is The CEO of Adasight. She is an accomplished Digital Marketing Leader with 10+ years of expertise in business growth, experimentation, and market expansion. Before Adasight, she was a Senior Global Marketing Lead at Booking.com headquarters in Amsterdam, managing global campaigns for their affiliate program with multimillion-dollar budgets annually.
She is also a growth mentor at Endeavor, helping series A & B startups resolve their main scale-up challenges. She has also worked across Europe for companies such as Bigsearch Bidmath.