What is the Customer Acquisition Cost?
Getting people to buy your product or service always requires some form of upfront investment. This is true for every type of product (software, hardware, SaaS, e-commerce, retail) or service (consulting, advising, etc.) – though the actual investment will vary widely depending on the nature of what you’re selling. What you pay to get one person to buy your product or service (i.e. to acquire a customer) is called the customer acquisition cost, or CAC. For example, if you spend a total of $1,000 and land 5 customers, then your customer acquisition cost would be $200.
How do you measure the customer acquisition cost?
Calculating your customer acquisition cost is relatively straightforward. The formula is as follows:
CAC = (Total amount spent on marketing and sales) / (Total customers acquired)
As mentioned above, if you spent $1,000 on a marketing campaign and acquired 5 customers as a result, then your customer acquisition cost is $200.
The main challenge in determining your company’s customer acquisition cost is deciding what to include in your total amount spent on marketing and sales. For instance, a recurring question is whether companies should include salaries, or whether office space and other fixed expenses should be included in the customer acquisition cost calculation. While there are a number of possible ways to go about it, the total amount spent on marketing and sales usually involves three things: salaries, tools and spend. Here are a few examples for each of these categories.
- Salaries: the yearly gross salary of your sales and marketing employees.
- Tools: the tools that the sales and marketing teams use to do their job – for instance, Hubspot, Salesforce, Outreach, LeadIQ, Customer.io, LeadIQ and so on.
- Spend: the amount spent on marketing campaigns.
Below is a more detailed overview of the customer acquisition cost calculation, breaking down the total amount spent on sales and marketing (using fictional numbers).
Why it’s important to understand your customer acquisition cost
Understanding your customer acquisition cost is important, because it’s what allows you to get a sense of where each dollar you’re spending on sales and marketing is going, and how effective your efforts are in bringing in new customers for your business. Once you get a good understanding of your customer acquisition cost, you can start optimizing your campaigns and decreasing or increasing spend to ensure you’re not overspending to acquire new customers.
Another reason why understanding your customer acquisition cost is critical is that it can be used to optimize your LTV/CAC ratio. That's Lifetime Value over Customer Acquisition Cost.
A customer's LTV is the amount of revenue they provide you with over the span of being a customer. Like CAC, it's based on an average, as some customers will churn after a few months, while others are loyal for years.
Generally, the average customer subscribes to your service month after month, or upgrades annually, or buys from your product lineup periodically, and then eventually they churn. The amount of revenue they bring to your business between their first purchase and their last is their LTV. As with your marketing, you must be getting a return out of your CAC investment. Your LTV needs to be greater than your CAC a majority of the time, or else you're losing money. Knowing your CAC will help you monitor this.
Ideally, your LTV/CAC ratio should be 3 or higher. Looking at our example above, that means that if your customer acquisition cost is $862.20, your customer lifetime value should be around $2,586.60 or higher.
Calculating your customer acquisition cost with Weld
To get an accurate measurement of your customer acquisition cost, it’s important to include all the costs associated with customer acquisition. To do this, a tool like Weld is a great option. It allows you to easily connect your tools to sync data to your data warehouse up to every minute, without having to write custom code or APIs. You can then use Weld to create your customer acquisition model directly in the platform. And the best part is, if you have trouble deciding what to include in your CAC model or how to create it, we have a team of on-demand data analysts who’ve helped hundreds of companies to create their CAC models – and they’d be happy to help. Learn more about Weld or get started right away!