Unless you have an unlimited budget and resources, customer acquisition costs (CAC) can be the difference between efficient growth and startup doom.
Your CAC is an indicator of how effective your sales and marketing efforts are, how efficiently you’re acquiring new customers, and even whether or not you have product/market fit.
Needless to say, you need to understand how to track, analyze and improve your CAC if you want your startup to succeed long term.
In this guide, we’re going to go over everything you need to know about customer acquisition costs so your business not only grows but thrives.
Table of contents:
- What is CAC?
- CAC and Customer Lifetime Value
- How to Calculate CAC
- Why is CAC Important?
- CAC Benchmarks
- How to Reduce CAC
What is Customer Acquisition Cost?
Customer Acquisition Cost (CAC) is how much money you spend in sales and marketing to acquire one new customer.
Trying to find the “sweet spot” is something a lot of startups struggle with.
Spend too much to acquire customers and you won’t be able to recoup the money, let alone make a profit. Spend too little, and you might not be maximizing your company’s growth potential.
Generally speaking, your goal is to keep your CAC within budget, while achieving your customer growth targets!
CAC & Customer Lifetime Value
CAC by itself is a helpful metric. But in order to add more context, you need to measure it up against your customer lifetime value (LTV).
LTV is the average amount of money a customer pays you before they stop being a customer. For instance, if you’re a SaaS company and your average customer pays you $1,000 over the course of their subscription before they cancel, you’d have an LTV of $1,000.
If your average cost to acquire those customers is less than $1,000 then you’re in a good position. But if it costs you $1,500 to acquire customers, then you have a big problem.
That relationship between your LTV and CAC is called your LTV:CAC ratio.
How to Calculate Customer Acquisition Cost
In order to calculate your customer acquisition cost, take your sales and marketing expenses over a set period of time and divide it by the number of customers you acquired over that time period.
Sum of Sales and Marketing Expenses / # of new customers acquired
Here’s an example.
If you’ve spent $5,000 on sales and marketing efforts in the last three months and acquired two new customers, then your CAC is $2,500.
A common question founders have is which sales and marketing expenses should be included in customer acquisition cost?
Essentially, any costs involved with getting new customers over your specified time period should be included.
Here’s a list of some of the most common marketing and sales expenses that you would include in CAC:
- Design for marketing materials (ad designs, landing pages, etc.)
- Sales and marketing employee salaries
- Advertising spend
- Sales and marketing tools (CRM system, reporting tools, etc.)
- Anything else incurred as it relates to sales and marketing
If you’re tracking your expenses with a tool like Quickbooks or Xero, calculating CAC is much easier.
To take things a step further, you can add that data into Finmark to see how your CAC fits into your overall financial forecast (Xero integration coming soon).
Made with Finmark!
We suggest tracking your CAC as early on in your startup as possible. As you start to test new marketing strategies, grow your team, and make other changes, you can see whether they make a positive or negative impact.
Why is CAC Important?
You’re probably already starting to get an idea of why CAC is such an important metric. But here are some reasons why you need to track your customer acquisition costs closely.
Find The Most Efficient Marketing Channels
If you’re spending money on marketing, particularly through paid channels like social media ads, Google Ads, and media buying, you need to keep a close eye on CAC.
Instead of just measuring your CAC as a whole, you should track your acquisition costs per marketing channel as well.
For instance, let’s say you’re running ad campaigns on multiple channels like this:
|Channel||Ad Spend||# of Customers||CAC|
The newsletter ad got you the most customers overall, but you had to spend twice as much as your other two channels to get them.
Looking at the numbers, Google Ads seems to be the most efficient use of your marketing dollars, so now you know where to put more resources.
If you’re trying to decide where to put your marketing dollars, CAC is a great indicator of which marketing channels yield the best results.
Optimize Your Sales And Marketing
On a similar note, your CAC can also improve your sales and marketing efforts.
Remember, the CAC formula takes into account all of your marketing and sales expenses. So if your LTV:CAC ratio starts to look more like 1:3 instead of 3:1, you know there’s an issue somewhere.
The problem could be that a specific marketing channel isn’t working well, your sales team is underperforming, or any number of other reasons. Use CAC as an indicator of how efficiently you’re spending your sales and marketing dollars to help identify problems or opportunities for optimization.
Find Your CAC Payback Period
When you spend money to acquire new customers, the plan is to make that money back and then some. Your CAC payback period tells you how many months it’s going to take to recoup the money you spent.
The higher your CAC payback period, the harder it is to grow your startup.
Let’s look at a quick example of how it works with a single customer.
Let’s say it cost you $250 to acquire a customer, and they’re paying you $25/month. You need that customer to stay with you for at least 10 months in order for them to pay back the amount you spent to acquire them.
If that customer churns within those 10 months, you’ve essentially lost money.
Now, imagine if instead, it only took you $100 to acquire that same customer. You’d get the money back in four months.
It’s a much quicker path to profitability and sustainable growth.
But it all starts with knowing your CAC.
What’s a Good CAC Benchmark?
There are a few CAC benchmark reports floating around online. But the numbers vary so much that it’s hard to compare your own business to the data.
For instance this study shows most industries have an average CAC of over $100, but it doesn’t account for company size, product price, and other factors.
Your industry, target audience, pricing, and more, all have an impact on customer acquisition cost. That makes it really difficult to benchmark against other companies.
Instead, you can use yourself as a benchmark. As long as your LTV:CAC ratio is positive, you’re likely in a good position for your startup.
How to Reduce Customer Acquisition Cost
Like we mentioned earlier, the goal is to minimize your CAC while meeting your growth targets. But how exactly do you do that?
Here are a few ideas.
1. Constantly Test New Marketing Channels
When you need a contractor to work on your house, do you just go with the first quote? Or do you shop around to get the best price?
Hopefully, it’s the latter. Otherwise, you might be overpaying.
Marketing is similar. If you commit yourself to just one or two marketing channels, you won’t know if there are more efficient places to get customers.
It’s always good to test the waters a bit and experiment with different channels to see which gives you the most bang for your buck. Just remember to measure your CAC for each channel.
- 22 Overlooked Digital Advertising Channels That Can Drive Acquisition
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2. Improve Your Funnel
A bad funnel can kill your customer acquisition cost. Two startups can sell very similar products, but if one has a better marketing and sales funnel than the other, they’re going to acquire customers for less money.
Let’s take a look at an example of two companies selling a similar product. They have the same process for their sales and marketing funnel and they both spent $1,000 to acquire 100 leads.
Notice the drop off rates after each stage.
|Stage||Business A (# of Leads Remaining)||Business B (# of Leads Remaining)|
You can see Business A loses 40% of their leads after the first stage, and then another 66% after the trial stage. So they end up with 20 paying customers for the $1,000 they spent—a CAC of $50.
On the other hand, Business B retains more customers through each stage and acquired 50 customers with a $20 CAC.
That’s the power of an effective funnel, and how it can drastically improve your CAC.
- 18 Proven Ways to Increase Your Conversion Rate Throughout Your Sales Funnel
- 9 Ways to Make Your Sales Funnel Convert Better
3. Use Retargeting
Retargeting is one of the best ways to decrease your CAC because you’re showing ads to people who’ve already been to your website before.
That means they’re already somewhat familiar with your brand, and aren’t as “cold” as someone who’s never heard of you before.
One of the most common examples of this is when someone lands on your website via an article they found on Google. Then, you can retarget them on Facebook, Google, or another ad channel. Studies show retargeted visitors are anywhere from 43–70% more likely to convert than a cold lead.
4. Invest in Sales Training
You might be thinking, “won’t spending money on sales training add to my acquisition costs?”
In the short term, yes. But if the training works well and your sales team is able to convert customers more efficiently, it’ll lower your CAC over time.
According to data from Accenture, for every dollar a company invests in sales training, they get about $4.53 in return. Spend the money now and reap the benefits long term.
- 12 Sales Training Techniques To Build An Unstoppable Sales Team
- Top 40 Sales Training Programs and Techniques That Will Help You Win
Get a Grip On Your Customer Acquisition Cost
For startups, every dollar counts. Understanding CAC means you can invest the right amount of money into marketing and sales, instead of taking all those hard-earned fundraising dollars and flushing it down the toilet.
The right sales and marketing strategy can make or break your company, and knowing your CAC will set you up for success in the long run.
You can calculate customer acquisition cost by using this formula: Customer Acquisition Cost = Cost of Sales and Marketing divided by the Number of New Customers Acquired.What is the customer acquisition cost CAC benchmark? ›
Customer Acquisition Cost (CAC) is the total cost of acquiring new customers, which is calculated by adding up sales and marketing costs and dividing them by the number of new customers for a specific period. This metric represents one of the most important KPIs for investors.What is the CAC customer acquisition formula? ›
A business' CAC is calculated by dividing all sales and marketing costs by the number of New Customers gained within a specific period. A simple example would be, if Tommy spent $10 to market his lemonade stand and got 10 people to buy his product in 1 week, his cost of acquisition for that week is $1.00.What are good CAC metrics? ›
A good benchmark for LTV to CAC ratio is 3:1 or better. Generally, 4:1 or higher indicates a great business model. If your ratio is 5:1 or higher, you could be growing faster and are likely under-investing in marketing.How do you calculate CLV and CAC? ›
- CLV = Average Revenue per Account (ARPA) / Customer Churn.
- CLV = Average Revenue per Account (ARPA) × Average Customer Lifetime.
- CAC is simply: Total Sales and Marketing expense / # of new customers.
What is a good customer acquisition cost? Most commonly, businesses will benchmark their customer acquisition cost against customer lifetime value. A CAC:LTV ratio of 1:3 is generally considered a good ratio, though it will vary greatly for different businesses.What is the benchmark for CAC recovery? ›
The general benchmark for startups to recover CAC is 12 months or less. High performing SaaS companies have an average CAC payback period of 5-7 months. Larger enterprises can (and often do) have a longer CAC Payback Period since they have greater access to capital.What is CAC benchmark? ›
Your CAC is an indicator of how effective your sales and marketing efforts are, how efficiently you're acquiring new customers, and even whether or not you have product/market fit.What is the basic formula for calculating the cost per acquisition? ›
To calculate the cost per acquisition, simply divide the total cost (whether media spend in total or specific channel/campaign to acquire customers) by the number of new customers acquired from the same channel/campaign.What is the difference between cost per acquisition and CAC? ›
CAC and CPA are very similar and useful metrics, but there is one key difference: CAC measures the cost to acquire a paying customer, while CPA measures the cost to acquire a lead — for example, a registration, activated user, or a sign-up for a free trial.
In short, to calculate CAC, you add up the costs associated with acquiring new customers (the amount you've spent on marketing and sales) and then divide that amount by the number of customers you acquired. This is typically figured for a specific time range, such as a year or a fiscal quarter.Do you want a high or low CAC? ›
Generally speaking, having a lower CAC than your competitors is a good thing. The less it costs you to bring a customer in the door, the better.What is the golden ratio for LTV CAC? ›
LTV:CAC RATIO 3:1 – The golden ratio of 3:1 means you're making three times more money than you spend to acquire customers. Know the lifetime value (LTV) of your customers and your customer acquisition cost (CAC).What happens if your CLV is greater than your CAC? ›
On the other hand, if your CLV is higher than your CAC, you are making a profit from each customer, in which case, you should focus on acquiring more customers to increase your revenue. Increasing your marketing efforts or improving your product or service offerings are effective ways of bringing in more business.What is LTV to CAC ratio? ›
The Customer Lifetime Value to Customer Acquisition Cost (LTV:CAC) ratio measures the relationship between the lifetime value of a customer and the cost of acquiring that customer. The LTV:CAC ratio is calculated by dividing your LTV by CAC. LTV:CAC is a signal of profitability.
Conclusion. A Good Customer Acquisition Cost varies by the industry and tactics used. But a good way to benchmark your CAC is by comparing it to Customer Lifetime Value (also known as LTV). It is said that an ideal LTV to CAC ratio is 3:1.What is the average CAC for a small business? ›
Small businesses tend to spend 20$ per customer while larger businesses like Amazon and eBay spend good customer acquisition costs, somewhere between $120 to $160. If the customer lifetime value and CAC cost ratio are three or greater, spending CAC is worth it.What is a good cost per acquisition? ›
What is a good cost per acquisition? A good cost per acquisition ratio is 3:1, so ideally about 3 times lower than the customer lifetime value (CLV). If your ratio is 1:1 or close to it, your acquisition cost is more than it should be.What is a good blended CAC ratio? ›
A “good” blended CAC ratio is Customer acquisition campaigns must ben costs divided by the number of customers acquired in a given period. Ideally, this ratio should be less than three. This means that for every dollar spent on acquiring new customers, you should receive at least three dollars in return.What is the average CAC over time? ›
An average Lifetime Value to Customer Acquisition Cost ratio is often 3:1, and anything higher than this is even better. However, as I have discussed above, do keep into account how the industry you operate in affects your CAC.
CTR is the number of clicks that your ad receives divided by the number of times your ad is shown: clicks ÷ impressions = CTR.What is the basic formula of cost? ›
The general form of the cost function formula is C(x)=F+V(x) C ( x ) = F + V ( x ) , where F is the total fixed costs, V is the variable cost, x is the number of units, and C(x) is the total production cost.How do you determine the cost of an acquisition of a company? ›
Acquisition Cost (Stock Offering) = Exchange Ratio * No. of Shares Outstanding (Target) The total acquisition cost, in addition to the purchase price, includes transaction costs.How do SaaS companies calculate CAC? ›
To calculate your customer acquisition cost, you simply take the sum of all your sales and marketing expenses over a given duration (including human capital costs) and divide it by the number of customers acquired in the same time period.What is a good magic number? ›
A magic number over 0.75 should give you the green light to build out the sales and marketing strategy and functions. You reach this level when you've proven product-market fit and acceptable CAC payback periods.What does a consistently high customer acquisition cost CAC indicate? ›
But when applying specific campaigns or digital marketing efforts, marketers can use CAC to ensure they're not paying too much to acquire a single customer. The higher the CAC in relation to the cost of goods and services, the lower the ROI, which is an indicator that targeting is not effective for that campaign.Does CAC always increase over time? ›
One of the most important metrics for B2C companies is customer acquisition cost also known as, CAC. One debate is whether the cost rises or falls over time. The argument for rising CAC is the next marginal customer is generally harder to acquire than your last customer.What is the KPI for customer lifetime value? ›
One common KPI for CLTV is the ratio of customer lifetime value to customer acquisition cost (CLTV:CAC). This metric compares the total revenue earned from a customer over their lifetime to the cost of acquiring that customer, providing a measure of the return on investment (ROI) for customer acquisition.What is a good LTV to CAC ratio in a SaaS business? ›
LTV should be at least 3 times the CAC for running a financially healthy SaaS business. If your LTV:CAC ratio falls below 1:1, your business is incurring losses. A very high LTV:CAC ratio may indicate that you are not spending as much as you should for acquiring new customers.What is the usual customer acquisition cost? ›
I define Customer Acquisition Cost as: Total Marketing and Sales Spend divided by Total New Customers. This calculation is made on a channel by channel basis. For example, if you spent $1,000 acquiring 5 customers through SEM, your CAC for SEM would be $200.
Average customer acquisition based on industries
Retail: $10. Consumer Goods: $22. Manufacturing: $83. Transportation: $98.
How do you calculate CAC? Calculate CAC by dividing the total expenses to acquire customers (cost of sales and marketing) by the total number of customers acquired over a given time.What is a good cost per acquisition ratio? ›
A good CLTV:CPA benchmark, according to various marketing experts, is 3:1. If your ratio is 1:1 or close to it, your acquisition cost is more than it should be. But if it's higher than the benchmark, such as 4.5:1, you're likely not spending enough and might be losing opportunities to acquire and convert leads.What are typical CAC eCommerce? ›
The average CAC on the eCommerce scene is around $45 to $50.
However, this is only a range, with many small businesses typically spending about $20. Furthermore, eCommerce giants such as Amazon and eBay spend as high as $150 to acquire a single customer.
Generally speaking, having a lower CAC than your competitors is a good thing. The less it costs you to bring a customer in the door, the better. However, as with many things in life, you get what you pay for.