Customer Acquisition Cost: How to Calculate CAC [+Benchmarks & Formulas to Know]

As a marketer or business owner, you‘re always looking for ways to optimize your marketing spend and acquire new customers efficiently. One of the most important metrics to track and understand is customer acquisition cost, or CAC.

In this comprehensive guide, we‘ll dive deep into what CAC is, why it‘s important, and how you can calculate and improve it for your business. We‘ll cover:

• What is customer acquisition cost (CAC)?
• Why is CAC important?
• How to calculate customer acquisition cost
• Breaking down CAC into its components
• CAC benchmarks by industry (with data)
• Proven strategies to reduce customer acquisition costs
• Balancing CAC with other key metrics
• Real-world examples of CAC optimization in action

By the end of this post, you‘ll have a complete understanding of CAC and a toolbox of strategies to start optimizing your own customer acquisition efforts. Let‘s jump in!

What is Customer Acquisition Cost (CAC)?

First, let‘s define exactly what we mean by customer acquisition cost. Simply put, CAC is the total cost of acquiring a new customer. This includes all the sales and marketing expenses required to attract, convert, and close a new customer, divided by the number of new customers acquired in a given time period.

Here‘s the basic formula:

CAC = Total Sales & Marketing Expenses / # of New Customers Acquired

For example, let‘s say your company spent $100,000 on sales and marketing last quarter, and you acquired 1,000 new customers in that same time period. Your CAC would be:

$100,000 / 1,000 = $100 per new customer

This means that, on average, you‘re spending $100 to acquire each new customer for your business. But what exactly goes into that "sales and marketing expenses" part of the equation? We‘ll break that down in a bit. First, let‘s talk about why CAC is such an important metric to track.

Why is Understanding CAC Important?

Knowing and tracking your customer acquisition cost is critical for a few key reasons:

1. Profitability – If you‘re spending more to acquire customers than you‘re earning from them, your business will quickly become unprofitable. Understanding CAC helps you ensure you‘re acquiring customers at a sustainable cost.

2. Efficiency – CAC is a measure of how efficiently your sales and marketing efforts are at bringing in new business. A lower CAC means you‘re acquiring customers in a more cost-effective way, while a higher CAC may indicate inefficiencies or wasted spend.

3. Budgeting & Planning – Knowing your current CAC helps inform your sales and marketing budget and headcount planning. You can model out how many customers you need to acquire to hit your revenue goals and how much you can afford to spend to get there.

4. Benchmarking – Comparing your CAC to industry benchmarks and competitors can show you how you stack up and identify areas for improvement. If your CAC is significantly higher than the norm, you know you likely have room to optimize.

Ultimately, the goal is to minimize your customer acquisition costs while still bringing in valuable new business. A lower CAC means more efficient spend, higher ROI, and faster growth for your company. Tracking it over time helps you gauge the effectiveness of your acquisition efforts.

How to Calculate Customer Acquisition Cost

Now that we know what CAC is and why it‘s important, let‘s walk through how to actually calculate it for your business.

Step 1: Define Your Time Period

First, decide on the time period you want to measure. Most businesses calculate CAC on a monthly, quarterly, or annual basis. It‘s important to be consistent with your time period so you can track and compare CAC over time.

For this example, let‘s use one quarter (three months).

Step 2: Tally Your Total Sales & Marketing Expenses

Next, add up all the costs associated with your sales and marketing efforts for the quarter. This should include:

• Advertising spend (Google Ads, Facebook Ads, etc.)
• Marketing agency and contractor fees
• Content creation costs (writing, design, video production, etc.)
• Marketing and sales software and tools
• Salaries and commissions for marketing and sales team members
• Freelancers and consultants
• Overhead costs attributable to the marketing/sales teams

Basically, you want to account for all the time, headcount, and expenses that went into generating leads and closing new customers for the quarter. Let‘s say the total comes to $250,000.

Step 3: Tally Your New Customers Acquired

Now, count up the total number of new customers you gained during that same quarter. Let‘s say you closed 2,000 new customers in the period.

Step 4: Calculate!

You have your total sales and marketing expenses ($250,000) and your total new customers acquired (2,000). Now simply divide the expenses by the new customers:

$250,000 / 2,000 = $125 CAC

This means you spent an average of $125 to acquire each new customer in the quarter.

Repeat this calculation each month, quarter, or year (whichever time period you chose in step 1) to track your CAC over time. But knowing your CAC is just the first step. To really get insights from this metric, it helps to break it down further.

The Components of CAC

It‘s useful to look at each component of your sales and marketing spend to see what‘s really driving your overall customer acquisition costs. This can help you identify areas to optimize or scale back.

Some key components to look at:

• Paid Advertising – This is often a big chunk of CAC, especially for companies relying heavily on PPC or social media ads. Look at your spend and conversions by channel to optimize.
• Content Creation – Producing blog posts, ebooks, webinars, and other lead generation content takes time and resources. Track the ROI of each type to see what‘s most effective.
• Employee Compensation – Salaries for your marketing and sales staff should be factored into CAC. Look at the cost relative to how many customers each team member is helping bring in.
• Technology & Tools – Marketing automation platforms, CRMs, and other software can add up. Make sure you‘re getting enough value from each tool to justify the cost.
• Events & Sponsorships – Conferences, trade shows, and other events can generate leads, but often at a high cost. Measure the true value of event spend relative to other channels.

By breaking out your CAC into these components, you can start to see which levers to pull to reduce costs. Maybe you find that certain paid ad channels are far less efficient than others and cut spend there. Or you realize you‘re paying for martech tools you don‘t really need.

The key is to look at each expense with a critical eye and ask: Is this truly adding enough value to justify the cost?

CAC Benchmarks by Industry

So you‘ve calculated your company‘s CAC. But how do you know if it‘s "good" or not? One helpful way to assess your CAC is to benchmark it against similar companies in your industry.

While CAC can vary widely depending on business model, average sale price, and target customers, here are some general benchmarks for common industries:

Industry	Median CAC
B2B SaaS	$205
IT Services	$184
Financial Services	$175
Consumer Goods	$127
Retail	$102
Travel & Hospitality	$86
Media & Entertainment	$52

Source: Propeller Research, 2020

Keep in mind these are median values – meaning half of companies have a CAC higher than this, and half have lower. Where you fall on the spectrum will depend on a variety of factors.

In general, businesses with higher-priced products or services (like enterprise software) will have a higher CAC, while those with lower-cost offerings (like consumer packaged goods) will have a lower CAC.

The key is to benchmark against companies that are similar to yours in terms of industry, business model (B2B vs B2C), and average selling price. If your CAC is significantly higher than your peers, it‘s a sign you may have room for optimization.

Strategies for Reducing CAC

If you‘ve assessed your CAC and determined it‘s higher than you‘d like, don‘t worry – there are plenty of proven ways to bring that cost down over time. Here are a few strategies to try:

Double Down on What‘s Working

Take a look at your marketing channels and tactics that are already producing customers efficiently. If certain types of content, ad platforms, or campaigns have a lower CAC than others, consider doubling down on those and scaling back the less efficient tactics.

Optimize Your Conversion Funnel

Small improvements to your website and conversion path can have a big impact on CAC. A/B test your ad copy and landing pages to improve click-through rates. Streamline your checkout or lead capture forms to reduce friction. Add live chat or chatbots to assist potential customers. Increasing your conversion rates means you can bring in more customers without increasing spend.

Implement a Customer Referral Program

Word-of-mouth is often one of the most effective and lowest-cost acquisition channels. Incentivize your current customers to refer their friends and colleagues with discounts, free upgrades, or cash rewards. Because these leads are coming from a trusted source, they tend to close faster and at a higher rate than other lead sources.

Invest in Lead Nurturing

Not every lead is ready to buy right away. Nurturing leads with targeted content and engagement over time can help move them closer to a purchase decision, without a lot of additional cost. Set up automated email campaigns based on a lead‘s interests and behaviors to deliver the right message at the right time.

Focus on High-Value Customers

Not every customer is equally valuable. If you can identify the characteristics of your highest lifetime value customers and focus your acquisition efforts there, you‘ll bring in more revenue over the long run – even if the initial CAC is higher. Use customer data to build lookalike audiences for your ad targeting.

Improve Your Sales Processes

Don‘t forget about the role your sales team plays in CAC! Improving lead qualification, sales enablement, and productivity can help reps close more deals faster. Implement a lead scoring system to prioritize the hottest opportunities. Create a sales playbook with proven scripts, email templates, and case studies to make your reps more efficient.

The key with all of these strategies is to test, iterate, and continually improve. Reducing CAC is an ongoing process that requires experimentation and optimization over time.

Balancing CAC with Other Metrics

While CAC is an important metric to track, it‘s just one piece of the puzzle when it comes to customer acquisition. It‘s important to balance it with other key metrics like:

• Lifetime Value (LTV) – This is the total amount of revenue you expect to earn from a customer over the course of their relationship with you. Ideally, your LTV should be significantly higher than your CAC – otherwise you‘re losing money on each customer! Aim for at least a 3:1 ratio of LTV to CAC.

• Payback Period – This is the amount of time it takes to recoup your acquisition cost for a new customer. The faster you can pay back your CAC, the sooner that customer becomes profitable. A good benchmark is 12 months or less.

• Churn Rate – It‘s not just about acquiring customers cheaply, but keeping them around. If your churn rate is high, you‘ll have to spend more on acquisition to replace those lost customers. Focus on customer retention and satisfaction to get the most value from each customer.

The goal is to find the right balance for your business between bringing in new customers efficiently and maximizing the long-term value of those customers.

Examples of CAC Optimization in Action

To illustrate these strategies, let‘s look at a few real-world examples of companies that have successfully reduced their customer acquisition costs:

• Hootsuite, a social media management platform, reduced its CAC by 60% by focusing on organic, inbound lead generation like content marketing and SEO. By creating high-value content that ranks well in search and drives free traffic, they were able to significantly lower their reliance on paid acquisition.

• Chargebee, a subscription billing software startup, lowered CAC by 30% through experimentation and optimization. They A/B tested their paid ad copy and targeting, optimized their website for conversions, and implemented a customer referral program. By continuously iterating and improving, they were able to get more efficient over time.

• Evernote, the note-taking and productivity app, reduced CAC by building virality and word-of-mouth into their product. Their "freemium" model allows users to sign up for free and get value from the app, then upgrade to paid plans over time. They also make it easy for users to share and collaborate on notes, driving organic growth.

• Slack, the team communication platform, reduced CAC by focusing on customer retention and expansion. They offer a free plan to get teams in the door, then work to drive upgrades and seat expansion within those teams over time. By prioritizing customer success and product adoption, they‘re able to get more value from each customer they acquire.

As you can see, there‘s no one "right" way to reduce customer acquisition costs. The most effective approach will depend on your unique product, target customers, and growth stage. But by tracking CAC diligently, experimenting with different strategies, and balancing it with other key metrics, you can steadily improve over time and scale efficiently.

Conclusion

We‘ve covered a lot of ground in this guide to customer acquisition cost! Let‘s recap some of the key takeaways:

• CAC measures the total cost of acquiring a new customer, including all sales and marketing expenses
• Understanding and tracking CAC is critical for profitability, efficiency, budgeting, and benchmarking
• To calculate CAC, divide total sales and marketing expenses by the number of new customers acquired in a period
• Breaking CAC down into its component parts can help identify areas for optimization
• Benchmark your CAC against industry peers to assess your efficiency
• Strategies to reduce CAC include doubling down on what works, optimizing conversion rates, implementing referral programs, lead nurturing, focusing on high-value customers, and improving sales processes
• Balance CAC with other key metrics like LTV, payback period, and churn rate

Armed with this knowledge, you‘re well equipped to start tracking and optimizing CAC for your own business. Remember, reducing customer acquisition costs is an ongoing process that requires continuous experimentation and iteration. But the payoff in terms of efficiency and profitability is well worth it!

If you‘re just getting started with CAC tracking, begin by implementing a system to accurately track your sales and marketing expenses and new customers acquired each month or quarter. Use the formulas and benchmarks provided in this guide to calculate your baseline CAC and compare it to industry averages.

From there, implement one or two of the optimization strategies discussed and monitor your CAC trend over time. Continue to tweak and test until you start seeing improvements. And don‘t forget to keep an eye on related metrics like LTV and churn rate to make sure you‘re acquiring good, long-term customers.

With a focus on continuous optimization, you‘ll be well on your way to more efficient, scalable customer acquisition in no time!