What is customer acquisition cost or CAC?
Customer acquisition cost or CAC calculates how much a company spends to acquire a new customer. For a closer approximation it is convenient to include all types of expenses such as advertising, marketing, equipment, SEO and content marketing costs, etc. and divide it by the number of customers acquired.
Measuring the cost of customer acquisition, along with the lifetime value of a customer and the monthly recurring revenue will give you a clear idea of whether your company is running efficiently or not.
How to calculate the cost of customer acquisition
In this formula, total costs include all expenses related to customer acquisition, such as advertising, sales force salaries, commissions and any other expenses necessary to attract new customers. The number of customers acquired refers to the total number of customers obtained in a given period.
CAC=Total Marketing and Sales Costs / Number of Customers Acquired.
For example, if a company spends €1,500 to acquire 500 new customers in a month, its CAC is €300.
This figure is really useful to calibrate your investment and make the changes you think are necessary to go in the right direction towards growth. If your CAC is higher than your revenue over a long period of time, it is important that you look for a solution.
Components of the ACC
1-Marketing Costs:
- Advertising: Investment in paid campaigns (Google Ads, social networks, banners, etc.).
- Content: Spending on content creation, such as blog articles, videos and artwork.
- Marketing software: Tools for marketing automation, CRM, data analysis, etc.
- Events and promotions: Investments in trade shows, webinars, promotional events or any type of activity that promotes the business.
2-Sales Costs:
- Sales team salaries: Includes salaries of sales employees and associated personnel.
- Commissions: Additional payments to salespeople for each customer acquired.
- Sales tools: Expenditures on sales management software, CRM and other systems used by the sales team.
- Team Training: Investments in training and development of sales personnel.
3-Additional Costs:
- Customer Service: If the customer service team plays an important role in acquiring new customers, its costs should be included.
- Infrastructure: Expenses related to office space, technology and other resources used to support the customer acquisition process.
Importance of the CAC in Marketing
Company profitability: CAC helps determine whether marketing and sales efforts are being profitable. If the CAC is too high compared to the Customer Lifetime Value (LTV), the company could be spending more on acquiring customers than it actually gets in revenue from them, affecting the sustainability of the business.
Strategy optimization: Knowing the CAC allows marketing and sales teams to adjust their strategies. If the CAC is high, actions can be implemented to improve campaign efficiency, reduce unnecessary expenses and maximize customer conversions.
Data-driven decision making: CAC provides a clear metric for making decisions on marketing budget allocation. Companies can invest more in channels that generate customers at a lower CAC and avoid those that are costly and ineffective.
Business growth: A low and well-controlled CAC allows the company to scale more profitably. This makes it easier to acquire more customers with the same budget, driving long-term growth.
Comparison with Customer Lifetime Value (LTV): It is crucial to compare CAC with LTV to assess whether customer acquisition is being a positive investment. If LTV is higher than CAC, the company is in a good position; if not, strategies need to be adjusted.
Common errors when calculating the CAC
Not including all related costs: One of the most common mistakes is failing to consider all costs associated with customer acquisition, such as sales team salaries, marketing automation software, and other indirect costs. Including only advertising expenses can underestimate the true CAC.
Ignoring long-term costs: Some companies overlook the fact that certain acquisition costs are not limited to the immediate period. For example, brand marketing costs or content campaigns may impact customer acquisition for months or even years, and this should be accurately reflected in the calculations.
Not segmenting CAC by channel: A mistake is calculating CAC as a general figure without segmenting by acquisition channels (organic, paid, referrals, social media, etc.). Each channel has its own cost and performance, and not segmenting can hide which strategies are more effective or more expensive.
Measuring over too short a time frame: Calculating CAC based on too short a period can give a distorted view, as the effects of certain marketing campaigns may take time to reflect in customer acquisition. It’s essential to choose a representative time period to obtain a more accurate view.
Not including lost customer value (churn): Ignoring churn when calculating CAC can create an incomplete picture. If the company is acquiring new customers but losing a significant percentage of existing ones, the real acquisition cost will be higher as those lost customers need to be replaced.
Not adjusting the calculation for different customer segments: Companies often have different types of customers with varying profitability levels. Calculating CAC generally, without distinguishing between segments, can lead to incorrect decisions. One customer segment may have a higher CAC but be more valuable long-term, while another may have a low CAC but lower profitability.
Avoiding these mistakes will provide a more accurate view of CAC and help make more informed decisions about the efficiency of acquisition strategies.
How to interpret the CCS in different industries
B2B (Business to Business): In B2B companies, CAC tends to be higher due to longer and more complex sales cycles. Acquiring a customer may involve multiple meetings, product demonstrations, and negotiations, increasing sales costs. However, Customer Lifetime Value (LTV) is usually higher, which justifies a higher CAC. In this sector, the key is ensuring that LTV significantly exceeds CAC so that acquiring each customer is profitable in the long term.
B2C (Business to Consumer): In B2C companies, CAC tends to be lower compared to B2B since sales cycles are shorter and purchasing decisions are generally less complex. However, B2C businesses often have a higher volume of customers, allowing them to offset the CAC with a larger number of sales. In this case, quick conversions and optimizing acquisition channels (such as digital marketing, social media advertising, etc.) are essential to keep CAC low.
Product Industry: For companies selling products, CAC typically varies depending on whether the products are high or low value. Low-value products tend to have lower CAC because less effort is needed to convince customers to make a purchase. On the other hand, high-value products require a longer and more personalized sales process, which can increase CAC. In both cases, it’s crucial that CAC does not exceed the product’s profit margin to ensure profitability.
Service Industry: In service companies, CAC can depend on the complexity of the service offered. High-value or specialized services (e.g., consulting or financial services) tend to have a higher CAC due to customization and the ongoing client relationship. In contrast, more standardized or automated services, like digital platforms, may have a lower CAC due to higher scalability and less need for human interaction.
E-commerce: In e-commerce, CAC is highly sensitive to the performance of advertising campaigns and the sales funnel. A low CAC is crucial to maintaining competitive margins, especially when competing with large platforms. Here, optimizing digital marketing campaigns and improving the user experience can help reduce CAC.
In summary, the interpretation of CAC varies depending on profit margins, sales cycles, and the type of product or service offered. The important thing is to ensure that CAC aligns with the revenue generated from each customer and is sustainable for the business model in each sector.
Success stories in CAC
1. Dropbox: Viral growth through a referral program
The challenge: In its early years, Dropbox faced the challenge of acquiring customers profitably. As a cloud storage company, CAC could be high due to high competition and advertising costs, which affected their profit margins.
The solution: Dropbox implemented a simple and highly effective referral program. For each referred friend who joined Dropbox, both the user and the new customer received an additional 500 MB of free storage space. This incentive system motivated existing users to refer new customers, leading to viral growth of the platform without the need for large expenditures on traditional advertising.
The result: Thanks to this referral program, Dropbox significantly reduced its CAC. Instead of spending on paid advertising, users became its primary acquisition channel. This approach helped Dropbox grow from 100,000 users to 4 million in just over 15 months, achieving rapid and profitable growth with a very low CAC.
2. HubSpot: Using content marketing to reduce CAC.
The challenge: In the beginning, HubSpot was spending heavily on paid advertising and their sales team to acquire new customers, which significantly drove up their CAC. Their software subscription-based business model required them to optimize this cost to ensure long-term profitability.
The solution: HubSpot adopted a robust content marketing strategy. They created a blog that offered free educational content on digital marketing, sales and CRM, aligned with the needs of their target audience. In addition, they developed free tools such as calculators and templates, which captured leads interested in their services. This strategy was supported by SEO efforts to attract organic traffic, and was complemented by automated marketing to nurture leads into customers.
The result: HubSpot was able to reduce its CAC significantly by reducing reliance on paid campaigns and generating a steady stream of organic leads through its content. The blog became one of the company’s main growth engines, allowing them to scale without proportionally increasing their acquisition costs. As a result, HubSpot was able to achieve a favorable relationship between CAC and the Lifetime Value (LTV) of its customers, which boosted its profitability and growth.
References
1- HubSpot – Cost of Customer Acquisition (CAC): What It Is & How to Calculate It : A detailed article from HubSpot that explains what CAC is, how to calculate it and why it is important. It also includes practical examples and tips for reducing CAC in different industries.
LINK : https://blog.hubspot.com/marketing/customer-acquisition-cost
2- Neil Patel – Customer Acquisition Cost: How to Calculate CAC (Formula & Benchmarks): Neil Patel offers a comprehensive guide on how to calculate CAC and how to optimize it. It includes formulas, benchmarks and strategies that companies can implement to reduce their customer acquisition costs.
LINK : https://neilpatel.com/es/blog/costo-de-adquisicion-de-clientes-2/
FAQ on Customer Acquisition Cost (CAC)
To calculate the CAC accurately, add up all the costs associated with marketing and sales in a given period (including advertising, salaries, software, etc.) and divide that amount by the number of new customers acquired in that same period. It is important not to forget indirect costs in order to obtain a more accurate calculation.
A good CAC depends on the industry and business model, but a key benchmark is to compare it to the Customer Lifetime Value (LTV). Ideally, LTV should be at least three times higher than CAC, indicating that the cost of acquiring a customer is recoverable and profitable.