Customer Acquisition Cost (CAC)

What is customer acquisition cost (CAC)?

Customer acquisition cost (CAC) is metric showing the amount of money a company spends to acquire a new customer. It is calculated by dividing the total amount of money spent on marketing and sales by the number of new customers acquired during a specific period of time.

CAC is an important metric because it helps businesses measure the ROI of efforts to grow their customer base.

In order to develop a successful CAC model, it is important for businesses to understand their customers, know how and when to engage with potential customers, and ensure continued engagement over time.

Calculating CAC

Customer acquisition cost is calculated by dividing the total expenses of acquiring customers by the total number of customers acquired during a specific time period. There are two ways to calculate CAC: simple and complex.

Simple CAC Calculation

A simple CAC calculation equals marketing campaign costs divided by total customers acquired.

Simple CAC Calculation graphic: Customer Acquisition Cost = Marketing Campaign Costs [divided by] Total Customers Acquired

Complex CAC Calculation

A complex CAC calculation requires adding marketing campaign costs, wages associated with marketing & sales, cost of marketing & sales software, additional professional services, and overhead — and dividing it all by the total customers acquired.

 Complex CAC Calculation graphic: Customer Acquisition Cost = ([Marketing Campaign Costs + Wages Associated with Marketing & Sales + Cost of Marketing/Sales Software + Additional Professional Services + Overhead) [divided by] Total Customers Acquired

Customer acquisition cost (CAC) and lifetime value (LTV)

Customer lifetime value (LTV) is the revenue you get from any given customer over a specific period of time. By looking at LTV in conjunction with CAC, you can determine if your CAC is profitable. A profitable CAC means that your business is spending less on customer acquisition than the revenue that same customer is bringing to your business.

The true value of investigating these metrics in tandem is revealed when you talk about specific customer acquisition campaigns. By looking at campaigns along with CAC and LTV, you gain a better understanding of which campaigns are financially beneficial and those that cost more than they bring in. This leads to a better understanding of how to bring in new customers at a lower CAC and improve overall ROI.

Given the relationship between CAC and LTV, one of the methods to reduce CAC is by making improvements to increase LTV. One way to increase LTV is to use deep links, which improve the customer experience from onboarding to sustained engagement with an app.