What it means:

CAC, or Customer Acquisition Cost, is a vital metric in the world of business and marketing. It represents the cost a company incurs to acquire a new customer. Imagine you run an online store, and you decide to invest in advertising to attract new shoppers. The amount you spend on ads, marketing campaigns, and any associated expenses to gain a single new customer is your CAC. Typically, the formula for calculating CAC is total sales and marketing costs / number of customers acquired.

Why it matters:

Understanding CAC is crucial because it helps you evaluate the efficiency and sustainability of your customer acquisition efforts. If your CAC is too high, it might be unsustainable in the long run, potentially leading to financial challenges. On the other hand, a low CAC indicates that you are acquiring customers cost-effectively, which can lead to healthier profit margins.

In addition, CAC is a key factor in determining the payback period for acquiring new customers. For instance, if your CAC is $100, and the average revenue generated from a new customer in the first year is $200, it takes just six months to recover your acquisition cost. This information is essential for making informed decisions about scaling your business.

Specifically, if you are running multiple concurrent marketing campaigns, it helps with putting more money into the ones that cost less to acquire each incremental customer. Additionally, CAC is used to look at acquiring a customer for their first purchase; if you are a CPG company, future purchases are typically reflective of the product more than Sales and Marketing efforts.

Places it is used:

CAC is commonly used in various industries, from e-commerce to software-as-a-service (SaaS). It's a critical metric when evaluating the return on investment (ROI) of marketing campaigns. Marketers use CAC to assess which advertising channels and strategies are the most cost-effective in bringing in new customers.

Furthermore, CAC plays a vital role in predicting future growth and budget allocation. It helps businesses determine how much they can afford to spend on acquiring new customers without jeopardizing profitability. Lastly, when performing budget planning, CAC is a great way to determine whether or not your projections are reasonable. Companies often see their CAC increase as they grow and a company that is planning to cut their CAC in half either needs a really good story of the how, or should adjust their projections.

Where it gets tricky:

CAC can get tricky when it isn’t obvious whether or not the related costs can be attributed to the acquisition of a customer. For example, we work with a CPG company that has a partner that helps with spreading their brand and helping with recognition. This leads to more sales but it can be hard to determine how many sales c0me from a customer seeing this partner sharing our name versus natural acquisition. Additionally, brand building efforts will impact all acquisition streams and can be hard to quantify the value. Overall, CAC is a starting point for determining where to best spend marketing dollars, but ultimately, it can’t be used as the only metric.

The formula:

CAC is measured by taking the total Sales & Marketing spend over a period and dividing it by the total number of clients acquired in that time period. Let’s look at an example: