What Is Customer Acquisition Cost? (2 Unique Examples)
February 10, 2022 Edwin Kooistra
Do you have an inclination towards the field of marketing and business?
If so, then you must want to know:
What is CAC in marketing?
So, talking about CAC definition, it is actually an abbreviation of Customer Acquisition Cost, and is a vital business metric that is commonly used by companies across the globe to evaluate the required cost to acquire customers and continue their growth.
The lower the cost needed to acquire a new customer, the higher the profit is, as it indicates a lower cost for each new customer and suggests that your sales and marketing teams are efficient and properly scaled.
Why Is It Important to Know Customer Acquisition Cost?
Understanding customer acquisition costs is important for both investors and your company.
Investors can use CAC to help them decide whether or not they think your company is, and will continue to be, profitable.
On the other hand, businesses can use it to allocate resources and funds, strategize marketing campaigns, and guide them in their hiring and salary process.
Understanding and knowing the customer acquisition cost process can help companies build healthy financial projections and prepare according to the market needs. For example, when a company knows about the CAC, it could have an idea that if $50,000 is invested into their advertising costs, an X number of new customers will be acquired as a result. This helps secure funding, allot inventory, and run healthy operations with minimal waste.
It allows brands to build a client base, enable customer loyalty programs and minimize costs to increase return on investment (ROI).
Furthermore, the purpose of CAC is to help the company fully analyze its investment per customer and profit, as it compares the amount of money spent by the company to attract customers against the number of customers it actually gained. And this eventually helps in understanding customer churn rate and the reasons for it.
How to Calculate Customer Acquisition Cost?
The first step in calculating your customer acquisition cost is to determine the specific time range that you’re evaluating for (month, quarter, year). This will help you narrow down the scope of your data.
Then, add up together all your total marketing and sales expenses associated with acquiring new customers and divide that total by the number of customers that you acquired. The result value should be your company’s estimated cost to acquire customers.
Total marketing and sales expenses include:
- Cost of advertising
- Cost of your marketing team
- Salary of your sales team
- Creative costs
- Technical costs
- Publishing costs
- Production costs
- Inventory upkeep
It’s a really useful method to help you calibrate your investment and make sure that you’re making the right decisions for your growth.
Just try your best to make sure that the CAC is less than the expected revenue per customer so that you will make money with the chosen acquisition strategy.
A company spends $1000 on sales and marketing and generated 100 new customers during a one-year period. Therefore, we can compute CAC:
Customer Acquisition Cost (CAC) = = $10/customer
So, the company’s Customer Acquisition Cost is $10.
Examples of Customer Acquisition Cost
1) A Software Company
In this example, we take a fictitious CRM software company that spends $40,000 on a marketing campaign. After the campaign, they get to know that 2,000 new customers started subscriptions to their service.
Every year, the company is expected to invest an extra $50,000 on technical and production costs for these new customers.
The CAC for this software company would be:
CAC = = = $45/customer
This means to acquire each new customer, the software company spent $45.
2) A Real Estate Company
A real estate company that sells duplexes spends $25,000 on marketing and $17,000 on sales. After running their ads, the company acquires 70 new customers.
The CAC for this real estate company would be:
CAC = = = $600/customer
This means that the real estate company spent $600 to gain a new customer.
3) A Manufacturing Company
If a manufacturing company that sells building materials spends $10,000 on marketing and $5,000 on sales but acquires 200 new customers, then the company’s CAC is:
CAC = ($10,000 + $5,000) ÷ 200 = $15,000 ÷ 200 = $75
CAC = = = $75/customer
To acquire a new customer, this manufacturing company had to spend $75 on each of them.
A lower CAC is ideal since it shows that you have found the right product-market fit and your marketing strategy is converting users at a lower budget.