Customer Acquisition Metrics is a metric you must track.

Customer Acquisition Cost (CAC) is one of the top 5 metrics you must track every month.

Simply put, Customer Acquisition Cost is the amount of money you’d spend to make someone a paying consumer.

The good news is, it’s very easy to calculate. Unlike other complicated metrics like Customer Lifetime Value, CAC is much simpler.

How to calculate Customer Acquisition Cost (CAC)

To calculate, you can take the total amount of money spent on marketing & sales and then divide that by the number of new consumers you have acquired within the same period.

As you can see, you need to know the following elements —

• Cost of Marketing advertisement and promotions
• Marketing tools cost
• Marketing & Sales Manpower salaries, variable pays, and benefits
• Sales incentives and any sales related cost
• Total number of new customers you have acquired in the same period

For example, let’s take the example of a company, named Bookseller, selling books online. The company is spending $10,000 per month on advertising and promotions. The company marketing team costs $20,000 per month. They use marketing tools with subscription fees of $1,000. In addition, the team has run some campaigns with variable costs that totaled $2,000 in a month.

In total, Bookseller is spending — $33,000 in a month

In that same month, the company acquired 30,000 customers.

By using these numbers, Bookseller’s CAC becomes = $33,000/30,000 = $1.1

How to Use CAC Effectively

To understand the impact of CAC, it should be used with other metrics like LTV. Without that, CAC doesn’t mean much.

Additionally, CAC can help you lower your advertising costs if you look at channel-wise costs. Let’s see how.

Find the LTV- CAC Ratio

Customer Lifetime Value (LTV) calculates the estimated value a customer will bring to your company over the lifetime of their relationship with the company. Learn how to calculate it here —

We calculated that Bookseller has a CAC of $1.1.

Let’s assume their LTV is $11.

Bookseller needs to understand what the ratio of LTV: CAC is. In their case, it’s 10. LTV to CAC ratio has to be at least 3 for a company to become successful.

Check Customer Acquisition Cost Payback Period

CAC payback period shows how long it will take for a customer to generate enough revenues to cover their CAC.

I prefer using margin instead of revenue to calculate the payback period.

Let’s assume that customers of Booksellers are generating $0.1 on average per month.

Booksellers’ CAC is $1.1 and the average margin per customer per month is $0.1.

From there, they can calculate how many months are required for the customer to become profitable. In their case, it’s 11 ($1.1/$0.1) months.

Learn to reduce your CAC

It doesn’t matter if you have a low or high LTV to CAC ratio.

You should still continuously pursue ways to lower your CAC.

The first step is to check your channel-wise CAC.

For example, your Facebook ads’ CAC might be lower than Google ads. That information can help you shift your budget from Google ads to Facebook ads. You might even want to explore new channels that’d give even lower CAC than your existing channels.

Secondly, try to figure out the CAC of your competitors. If they can achieve lower CAC then you should too.

Additionally, always check your marketing funnel. The funnel tells you where you are losing people. Maybe you have a high awareness rate but a small percentage of them are considering.

You can then ask how to make them consider your product more. Will changing your price/product/promotions help? Should you try growth hacking techniques to get more people in the funnel?

Another step should be to check how easy it is for your customer to purchase our product. Amazon, for example, continuously A/B tests to find the best performing site for users. For brick-and-mortar stores, check how easy it is to find and get into the store, how your products are organized, queue length, the time needed to complete a bill, etc.

Lastly, your customer service and sales teams are critical. Are they converting your leads or giving up after a bit of work? If not, what can you do to help them convert more?

To summarize- Customer Acquisition Cost

If you don’t know your Customer Acquisition Cost, then you are doing it all wrong.

Stop everything today and set up processes to regularly track this metric.

Once you know that, it’s a continuous journey to improve aspects of your business to achieve more.

CAC will not only show you which channels to go for, but it will also tell you which customers you should target. It can even guide you to expand your business geographically or through new products.