As a product marketing lead, customer acquisition cost (CAC) sits at the center of my work because I want my marketing efforts to deliver the best possible return on investment. You’re probably wondering what CAC means and how it can influence your overall profitability.
That’s why I created this guide. I’ll show you how to calculate your CAC and suggest some expert-backed strategies to help you lower expenses.
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Table of Contents
- What is customer acquisition cost (CAC)?
- CAC Meaning Across Marketing, Sales, and Customer Success
- How to Calculate Customer Acquisition Cost
- Types of Costs to Include in a CAC Formula
- Customer Acquisition Cost Examples
- LTV to CAC Comparison
- Customer Costs by Industry
- How to Improve Customer Acquisition Cost
What is customer acquisition cost (CAC)?
CAC means customer acquisition cost. It measures how much your company spends attracting new customers. This metric includes all sales and marketing expenses, such as program costs, salaries, commissions, bonuses, and overheads.
I use CAC to assess my profitability, comparing the money I spend on acquiring customers to the number of profitable customers I secure. Every successful company I know aims to reduce CAC to maintain healthy sales, marketing, and customer service. Let’s explore these benefits in detail.
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Why is CAC important?
My years in marketing have taught me to appreciate how CAC influences profitability. I use this metric to guide my marketing resource allocation, keeping my spending on customer acquisition efficient.
It helps me focus on profitability and avoid sentimental customer acquisition efforts.
When I asked Marcelo Salup of Performist about his worst CAC mistakes while running his digital marketing agency, he said, “The most expensive ones I’ve ever made are spending too much time in trying to acquire a customer, just because I like their business, or the person, without stopping to think whether the ‘juice is worth the squeeze.’”
Such mistakes are common. We all like to brag about our impressive clientele. However, investing $500 to acquire a customer who only brings in $300 throughout our relationship is not how to scale a business.
Understanding my CAC lets me optimize my customer acquisition strategies for maximum profit. It also lets me measure my marketing efficiency, forecast revenue, and attract investors looking for sustainable business models.
If your CAC is too high, this could mean there are inefficiencies you must address to ensure long-term growth and stability.
How Businesses Avoid Customer Acquisition Traps
I talked with business decision-makers and quickly realized that high acquisition costs typically result from poor audience targeting and weak data. More importantly, I unearthed two ways they lower acquisition costs.
1. Research your audience thoroughly.
Interviews and focus groups provide relevant information about my target audience. And I’ve also found that other qualitative approaches like surveys are just as helpful.
Peter Kim, president and chief creative officer of MKR, a creative marketing agency, told me they choose acquisition channels by “conducting the proper research to understand where the target audience is and how they’re engaging with content.”
Likewise, Lisa Richards of The Candida Diet told me their biggest mistake was spending a fortune on a celebrity endorsement that didn’t connect with their core demographic. She said the experience taught them to “do deep audience research before a large-scale campaign.”
2. Test without end.
Testing helps you find the most cost-effective way to get the highest return on investment from your customer acquisition effort — even when you’re already profitable.
It also helps you decide your best mix of automation and high-touch approaches. As Peter Kim of MKR puts it, “Market research and creative testing also help us reveal audience preferences and develop more accurate customer journeys.”
Elliott Brown from Cache Financials, an SEC-registered investment advisory, corroborates Kim’s position: “Every dollar you spend should be testing a hypothesis.”
Lina Lugova, the CMO of Epom, an adtech company, shares these thoughts as well. She believes there’s “no better strategy for optimizing customer acquisition costs than neverending tests.” So, her company aims to conduct 10 tests per month with various customer acquisition channels.
Pro tip: If you’re running a new brand, start with high-touch channels in your customer acquisition strategy and dive into automated marketing channels as you grow.
I like how Elliott Brown puts it: “When you’re getting started in a competitive space, you can’t just say ‘let’s run some Google ads’ and hope for the best. Instead, you should literally run through a list of potential marketing channels [...] and identify where you have the highest likelihood of success.”
So, you might focus your initial customer acquisition efforts on influencer marketing, targeted social media ads, outreach to communities, or getting referrals from current customers.
As your brand grows, add scalable channels like SEO, inbound marketing, large-scale paid media, email nurturing, and retargeting while maintaining your profitable, high-touch channels.
Let’s explore some real-world CAC use cases.
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CAC Meaning Across Marketing, Sales, and Customer Success
I understand it’s tough to identify all budget items affecting CAC because you must consider every aspect of your business, not just marketing. Here’s what CAC means across different departments.
What does CAC mean in marketing?
When calculating CAC in marketing, consider all expenses, including hidden ones like software, content, agency, training, and overhead costs. Tracking these expenses helps me uncover the actual acquisition cost per customer, ensuring more accurate budgeting and better strategy adjustments.
My rule of thumb is to always look beyond apparent expenses. Secondly, prioritize marketing investments that generate ongoing returns with minimal maintenance costs.
I use fewer resources for paid ads whenever my inbound marketing is effective. So, I prioritize creating blog content that attracts high-quality leads organically.
What does CAC mean in sales?
I’ve also found that sales teams that consistently prospect and nurture a solid pipeline don’t need to hire more reps.
Your CAC in sales depends on the quality and quantity of your sales pipeline and how many deals each rep closes. The more efficiently your sales team can handle and close those deals, the better for your business.
What does CAC mean in customer success?
My experience with businesses reveals that when customer success teams nurture happy customers, they naturally attract positive reviews and referrals.
Word-of-mouth marketing lowers your CAC, improves spending efficiency, and increases returns. Calculate your current costs to guide your CAC reduction and use it to inform your focus on nurturing satisfied customers for organic growth.
Elliott Brown from Cache Financials told me an interesting story about how they used affiliate marketing to drive business results without significantly increasing their CAC.
He had worked with a SaaS startup in a well-established industry and noticed that nobody was doing affiliate marketing. The cost to experiment with it was low (since it’s performance-based), so they set up an experiment that succeeded — then scaled it.
Let me show you how to calculate your current CAC.
How to Calculate Customer Acquisition Cost
You can calculate your CAC by following three quick steps.
Step 1: Choose a period.
Pick a time frame for your customer acquisition cost calculations — like a month, quarter, or year. This will help you narrow down the scope of your data.
Step 2: Calculate your CAC.
To find your company’s estimated cost of acquiring a new customer, add up all marketing and sales expenses, then divide the total by the number of new customers you acquired.
Use this CAC formula:
CAC = (Cost of sales + cost of marketing) ÷ Number of new customers.
For instance, let’s assume my company invested $500,000 in sales and $300,000 in marketing last quarter, yielding 800 new customers.
My CAC would be ($500,000 + $300,000) ÷ 800 = $1,000.
Step 3: Compare your CAC to key business metrics.
After calculating my CAC, I compare it to other vital business metrics. This shows me where the costs are highest in marketing, sales, and customer service so I can optimize them.
Featured Resource: Free Customer Acquisition Cost Calculator
Let’s look at some variables you should factor into your sales and marketing costs.
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Types of Costs to Include in a CAC Formula
If you’re ready to calculate your customer acquisition cost but you’re not sure what your “cost of sales and marketing” is, check out seven categories worth including.
Ad Spend
Ad spend is the money you allocate for advertisement. Advertising is a great way to attract new customers. However, to achieve your acquisition goals, your campaigns must resonate with your target audience.
Need to be sure of your campaign’s effectiveness? Divide your ad revenue by your ad spend to gauge your return on investment.
Employee Salaries
Great employees don’t come cheap. But they’re always worth the investment. If their salaries are getting too high though, consider alternatives for reducing these costs other than pay cuts or layoffs.
Explore options like chatbots and marketing automation to boost productivity and supplement your team’s workflow.
Creative Costs
When running a business, creative costs cover everything from paying for talent to buying lunch for team meetings. They all contribute to content production expenses.
Technical Costs
Technical costs include the technology your marketing and sales teams use. For instance, if you buy a reporting tool that monitors the progress of your open deals, that would be a technical expense.
Publishing Costs
You incur publishing costs when promoting your brand. Influencer costs, TV air time, and paid appearances in magazines, newspapers, and podcasts are publishing costs.
Production Costs
Production costs cover everything you need to create your product or service. For instance, if you produce video content for your brand, you need to buy a camera, create a set, and edit the video. Expenses can pile up fast, especially if you’re not outsourcing.
Inventory Upkeep
Inventory means different things to different companies. If you’re selling physical goods, you’ll incur storage, handling, and transportation costs. But for SaaS companies like HubSpot, inventory upkeep involves spending on updates to keep customers happy.
Customer Acquisition Cost Examples
Let’s bring to life all we’ve discussed so far using examples.
Example 1: Digital Product or Service Company
Say I run a CRM software company and invested $30,000 in marketing and sales (all relevant costs included) that attracted 2,000 new customers. Now, I estimate spending an extra $50,000 yearly on tech and production for these new customers.
To calculate my CAC, I’d divide the total investment ($50,000 + $30,000) by the number of new customers (2,000).
So, CAC = ($50,000 + $30,000) ÷ 2,000
= $80,000 ÷ 2,000
= $40.
This means I spent $40 to acquire each new customer.
Example 2: Physical Goods Company
Imagine I run a consumer goods business selling keto-friendly beverages. I spent $9,000 on sales and $15,000 on marketing (including overhead, incentives, and other campaign costs) to acquire 4,000 new customers.
So, CAC = ($9,000 + $15,000) ÷ 4,000
= $24,000 ÷ 4,000
= $6 per customer I acquired.
My CAC only tells part of the story, though. So, I assess it against customer lifetime value. But how are these related? Let’s find out.
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LTV to CAC Comparison
Lifetime value (LTV) is the total revenue I expect to earn from a single customer throughout our relationship. LTV is one of my favorite metrics to track because it helps me justify my CAC regardless of how long it takes to achieve profitability.
Here are some things I keep in mind:
- Some campaigns won’t yield instant profits. Maximum profitability comes from customers patronizing me over time.
- Products with tight margins and high CAC fall into this category. Examples include grocery retail, consumer electronics, and subscription products. So, I can acquire a customer for $100, knowing they’ll spend $50 monthly on my product for the next two years.
- LTV is also valuable for highly profitable products. Premium products command instant or near-instant profits the first time customers buy because they typically sell for thousands of dollars per unit. For instance, Adobe Commerce subscription costs $22,000 yearly, and that price increases as your gross merchandise value increases.
Understanding a customer’s LTV helps me strategize for renewals, upsells, and customer retention, maximizing my overall profitability.
How to Calculate an LTV
I calculate an LTV by multiplying my customer value by the average customer lifespan.
How do you derive these figures, though? Here are some variables to plug into the formula:
- Average purchase value. Divide your company’s total revenue in a specific period by the number of sales during that same period.
- Average purchase frequency. Divide the total number of completed sales over a specific period by the number of buyers.
- Customer value. Multiply your average purchase value (APV) by your average purchase frequency (APF).
- Average customer lifespan. Average out the number of years a customer continues buying from you.
Since LTV tells me how much money I’ll make from a customer, I want to know how it compares to the cost of acquiring (and keeping) that customer. This comparison is the LTV to CAC ratio (LTV:CAC).
LTV to CAC Ratio
The LTV to CAC ratio guides my marketing, sales, and customer service spending. It provides a quick view of how much value customers bring compared to their acquisition costs.
Aim for a balanced ratio to maximize profitability. Ideally, you want to recoup the cost of acquiring a customer within a year, aiming for an LTV:CAC of 3:1. This means the lifetime value of each customer should be three times the acquisition cost.
If your ratio is closer to 1:1, it means you spend as much on acquiring customers as they’re worth. On the other hand, if your ratio is higher than 3:1 (e.g., 5:1), it means you’re not spending enough on sales and marketing, so you could be missing out on opportunities to attract new leads.
I asked top business executives how LTV influences their customer acquisition strategies. Here’s what Epom’s Lina Lugova said: “We analyze the CLV of different channels or multi-channel combinations and prioritize our budgets according to this metric.”
Marcelo Salup from Performist shares the same view. He considers LTV “the second most important variable after the maximum allowable cost of acquisition.”
So, what does a good CAC look like?
Well, it varies by industry. The next section of this guide will help you understand average customer acquisition costs across different industries.
Customer Costs by Industry
The cost of acquiring customers in my industry may differ from yours due to factors like competition, market trends, and industry regulations. However, the most common factors that influence CAC regardless of your industry include:
- Length of the sales cycle. How long does it take to close a sale?
- Purchase value. How much does the product cost?
- Purchase frequency. How often does a customer typically buy?
- Customer lifespan. How long does a customer remain a customer?
- Company maturity. How developed is the company?
Here’s a summary of the average organic and inorganic CAC across industries, according to FirstPageSage:
Now that you know where your industry stands, how do you improve your company’s CAC against this industry benchmark?
How to Improve Customer Acquisition Cost
From adopting new technologies to forging healthy partnerships and optimizing sales processes, I’ve explored several strategies to bring my LTV:CAC ratio closer to 3:1.
I also interviewed other marketing leaders to give you a bird’s eye view of where they’re finding success.
Tayler Cusick-Hollman, founder and CMO of the marketing software company Enji, noted that “customers are validating and justifying purchases via more channels than in the past.”
In response, Enji is adapting its messaging for multiple channels. Tayler acknowledges that crafting channel-specific messaging is challenging, especially for businesses with small marketing teams. However, she suggested getting to know customers better and experimenting more to clarify what needs adjusting to boost your CAC.
Let me show you how I drive my customer acquisition cost down while keeping a high LTV. You’ll quickly see that these ideas are surprisingly straightforward.
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Invest in conversion rate optimization (CRO).
Over the years, I’ve learned that lowering CAC requires me to optimize my website for more conversions. I ensure the website is mobile-friendly, test my copy for clarity, and create a touchless sales process so visitors can buy anytime.
Add value to your offerings.
I’ve also found that increasing customer value means giving them what they truly want. Collect customer feedback and deliver on their requests, be it a product fix, new feature, or additional offering. If you give them more bang for their buck, they’ll stick around longer.
Invest in customer service
Provide excellent service experiences to encourage customer loyalty and increase your LTV. Consider implementing omnichannel support, customer portals, help desks, and self-serve knowledge bases. Using customer service software is recommended.
Implement a customer referral program.
When my customer refers someone who’s already interested in my product, the CAC will be $0 if the lead converts. These “free” customers reduce my overall CAC. So, I recommend creating a referral program that turns customers into brand advocates.
Streamline your sales cycle.
I shortened my sales cycle and increased yearly sales by using HubSpot CRM and prospecting tools to connect with more qualified leads quickly and effectively. Streamlining your sales cycle is a low-hanging fruit since HubSpot CRM is free.
Understand the CAC Meaning and Calculations for Your Industry
CAC meaning is industry-specific. Even seasoned marketers — like me — with cross-industry experiences must consider each industry’s cost peculiarities. Inventory costs, for instance, mean different things to digital and physical product vendors.
However, over the years, I’ve realized that targeted marketing, ongoing testing, and efficient sales processes help me lower CAC. Follow all the tips I’ve provided in this guide, and you’ll achieve a healthy customer acquisition rate that ensures sustainable growth regardless of your industry.
Editor's note: This post was originally published in January 2023 and has been updated for comprehensiveness.
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