How to Calculate Customer Acquisition Cost (CAC)
All businesses gain customers (to various degrees, of course)...but not all businesses know how much they spend to acquire these customers.
The most commonly flawed thought process I've come across through my years of consulting is that as long as the company is gaining customers, things are good.
...not true.
Other flawed reasoning I often hear is that their company's sales/marketing processes are "different," or "complicated," so calculating something like CAC is not possible.
...also total BS.
Any business can and absolutely should understand how to calculate customer acquisition cost. No business is so "different" that they can't determine how much they're spending to gain new customers.
So if you happen to think your company fits in this "different" bucket or you simply haven't taken the time to tackle this metric, this article was tailor made for you!
Let's take a look at what CAC is, why it's important and how to find your own CAC.
What is Customer Acquisition Cost?
In short, Customer Acquisition Cost (CAC) is defined as:
The metric that shows the total average cost your company spends to acquire each new customer.
Given that this metric reveals how much money your company is spending to acquire each new customer, most companies in most circumstances seek to obtain the lowest CAC possible.
It's a pretty simple formula but it does require that you to have access to current and accurate expense and customer data, which I'll cover in a bit.
Why CAC is Important
Your CAC sheds light on far more than just the dollar amount you spend to gain a customer.
In fact, your CAC also provides strategic insight into key business processes and performance, such as:
- The efficiency of your marketing program - A high CAC may mean that your marketing department is spending more money than necessary to acquire new customers. This is often attributed to poor targeting, inconsistent messaging, antiquated outbound strategies, and the list goes on. Occasionally, a high CAC is considered normal for companies in a high growth stage.
- The efficiency of your sales process - If marketing is delivering qualified leads, high CAC may also mean that your sales process is poorly converting the leads delivered by marketing. This could be the result of inconsistent follow-up, inexperienced reps, improper goal/quota setting, ambiguous buyer-facing expectations, or many other factors causing friction within your sales funnel.
- The ability of your company to scale - Lacking insight into your CAC represents a lack of insight into profitability, thus an inability to effectively scale. If you're not sure how much money you truly have to work with, you can't be sure how best to hire new staff, implement new technologies, refine your product/service offering, etc.
- The ability of your company to maximize profits - As mentioned above, your profits are directly affected by your CAC. Know these numbers and you will greatly improve your ability to properly forecast and manage your business.
How to Calculate Your CAC
Alright, let's get to the math. Fortunately, the formula for calculating this metric is very simple.
To determine your CAC, you'll first need to know the following two numbers below.
As with any marketing or sales metric, you'll want to pull these numbers within the specified time period in which you're looking to measure CAC performance. Although it might go without saying, be sure the time period you select is shared by each number below - such as last month, last quarter, this year, all time, etc.
- TOTAL SALES & MARKETING COSTS (i.e. all program expenses + staff salaries including commissions & bonuses + any other additional overhead)
- NUMBER OF NEW CUSTOMERS (the total number of customers you've gained)
Now that you know the two basic numbers required, here is the formula to determine your customer acquisition sost:
Sales Costs + Marketing Costs ÷ New Customers = CAC
Boom, it's that simple! You've now uncovered one of the most fundamental and valuable performance metrics.
Beyond Your CAC
While knowing your CAC is critical, it's not the only metric you need to know.
There are also other important metrics - like your Marketing Percentage of CAC, your Ratio of Customer Lifetime Value to CAC, Time to Payback of CAC, and others - which are dependent on your ability to accurately calculate your CAC.
By mastering your customer acquisition cost (and reviewing it consistently), your ability to control your pipeline and profitability increase dramatically.
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