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Customer Acquisition Cost (CAC) measures the total cost of acquiring a new customer, combining all sales and marketing expenses.
Companies track CAC to assess the effectiveness of marketing strategies, budget allocation, and sales performance. Often a key topic during fundraising discussions, it helps startups understand the investment required to expand their customer base. When compared to Lifetime Value (LTV), CAC can help gauge unit economics and profitability on a per-customer basis.
CAC = Sales and Marketing Expenses / Number of New Customers Acquired
Fully Loaded CAC = All Costs Associated with Customer Acquisition / Number of New Customers Acquired
Paid CAC = Sales and Marketing Expenses / Number of New Customers Acquired via Paid Channels
To calculate CAC, divide your total sales and marketing expenses by the number of new customers acquired during the same period. It's important to include all associated costs in your calculations, such as advertising, salaries of sales staff, and the cost of marketing tools, to get an accurate figure. Note that Fully Loaded CAC considers overheads, cost of legal services, and discounts. Also, Paid CAC excludes salaries and overheads and only accounts for new customers acquired through paid channels.
To reduce CAC, leverage organic channels and boost content marketing, which can have a longer-lasting impact on inbound lead generation than traditional ads. Iterate and refine on your ICP to avoid spending resource on low-conversion segments and demographics. Also, implement referral programs and build virality into your product. Maintaining balance with LTV is important to ensure sustainable growth and avoid underinvestment in acquisition.
A lower CAC is not necessarily positive; it could signal underinvestment in growth opportunities. Conversely, a high CAC isn't necessarily unsustainable if offset by high LTV. It should be considered alongside your revenue metrics and growth phase.
