Customer Acquisition Cost or CAC: What is it and how to calculate it?

In the competitive world of digital marketing and sales, understanding and optimizing Customer Acquisition Cost (CAC) is critical to the success of any business.

According to a study by HubSpot, companies that manage to reduce their CAC by 20% see a 25% increase in their profitability.

Knowing and properly managing this indicator not only helps improve the efficiency of your marketing campaigns , but also provides a clear view of the profitability and sustainability of your company.

What is Customer Acquisition Cost (CAC) and what is it used for?

Customer acquisition cost, commonly known as CAC, is a metric that calculates the total cost incurred to acquire a new customer.

This value includes all expenses associated with sales and marketing, such as advertising , salaries of sales and marketing teams, software, among others.

CAC is crucial because it allows companies to understand how much they are spending to acquire a customer and whether those investments are paying off.

CAC helps determine the return on investment (ROI) of marketing and sales strategies, allowing companies to adjust their tactics to maximize efficiency and profitability.

How to calculate customer acquisition cost (CAC)?

Calculating CAC is a simple process, but it requires precision and the inclusion of all costs related to customer acquisition. Here is a basic formula:

$\text{<span data-mce-fragment="1" class="katex"><span data-mce-fragment="1" class="katex-mathml">CAC</span></span>}<span\; data-mce-fragment="1"\; class="katex"><span\; data-mce-fragment="1"\; class="katex-mathml">=</span></span>\frac{\text{<span data-mce-fragment="1" class="katex"><span data-mce-fragment="1" class="katex-mathml">Total cost of sales and marketing</span></span>}}{\text{<span data-mce-fragment="1" class="katex"><span data-mce-fragment="1" class="katex-mathml">N</span></span>}\stackrel{<span\; data-mce-fragment="1"\; class="katex"><span\; data-mce-fragment="1"\; class="katex-mathml">ˊ</span></span>}{\text{<span data-mce-fragment="1" class="katex"><span data-mce-fragment="1" class="katex-mathml">or</span></span>}}\text{<span data-mce-fragment="1" class="katex"><span data-mce-fragment="1" class="katex-mathml">number of new customers acquired</span></span>}}$\text{CAC} = \frac{\text{Total cost of sales and marketing}} {\text{Number of new customers acquired}} CAC = N or ˊ number of new customers acquired Total cost of sales and marketing

To get an accurate calculation, follow these steps:

1. Add up all sales and marketing costs : Includes advertising expenses, salaries, commissions, marketing software, and any other costs related to customer acquisition.
2. Determine the number of new customers acquired : This number should correspond to the same period of time in which sales and marketing costs were incurred.
3. Divide the total cost by the number of new customers : This will give you the CAC.

What are the components of the CAC?

For a detailed CAC calculation, it is important to consider all the components that contribute to acquisition costs:

• Digital advertising and marketing : Spending on paid ads , SEO , content marketing and social media campaigns .
• Salaries and commissions : Salaries of sales and marketing teams, as well as commissions paid on sales.
• Software and Tools : Costs of marketing automation tools, CRM , and other software used to acquire customers.
• Events and Trade Shows : Costs associated with participation in events, trade shows and conferences.
• Marketing Materials : Costs of designing, printing and distributing promotional materials.

How to interpret and use the CAC?

Once you have calculated the CAC, it is crucial to interpret it correctly in order to make informed decisions:

• Compare to Customer Lifetime Value (LTV) : Ideally, a customer's LTV should be significantly higher than the CAC. An LTV ratio
  of at least 3:1 is generally considered healthy.
• Analyze trends : Monitor CAC over time to identify trends. A rising CAC may indicate a need to review and optimize your marketing and sales strategies.
• Campaign Optimization : Use CAC to evaluate the effectiveness of your marketing campaigns. If a campaign has a high CAC, consider adjusting or changing the strategy to improve efficiency.

Strategies to reduce CAC

Reducing CAC is a key goal for many businesses. Here are some effective strategies:

• Improve audience segmentation : Ensure your marketing campaigns are targeting the right audience to maximize conversion and minimize costs.
• Sales Funnel Optimization : Identify and eliminate pain points in your sales funnel to increase conversion efficiency.
• Marketing Automation : Use automation tools to improve efficiency and reduce marketing costs.
• Referral Marketing : Encourage your current customers to refer new customers, thereby reducing acquisition costs.
• Content Marketing : Invest in content marketing to attract and nurture leads organically.

Importance of monitoring CAC regularly

Monitoring CAC on a regular basis is essential to maintaining the profitability and efficiency of your business. Here are some benefits of constant monitoring:

• Early problem detection : Identifying unexpected increases in CAC can help address problems before they significantly impact profitability.
• Continuous improvement : Regularly evaluating CAC allows for continuous adjustments and improvements to marketing and sales strategies.
• Informed decision making : A well-monitored CAC provides valuable data for making strategic decisions about marketing and sales investments.

The relationship between CAC and growth strategy

CAC is not only an efficiency metric, but it is also critical for planning a company’s growth strategy. A low CAC allows companies to reinvest more in marketing and sales, accelerating growth.

On the other hand, a high CAC can limit growth capacity and require adjustments in strategy to maintain profitability.

Written by Moises Hamui Abadi : I am an entrepreneur, founding partner of Viceversa and SoyMacho. After leading several digital businesses and advising several other businesses, I decided to form MHA Consulting, a digital marketing consultancy dedicated to growing and empowering digital businesses in more than 7 countries and generating more than 1,500 million pesos.