What Does Customer Acquisition Cost Mean?
Customer acquisition cost is a calculation of the total amount of money spent on acquiring a new customer. This dollar amount includes all sales and marketing expenses behind finding and convincing your customers to buy your product.
An Opex To Sales Dashboard
Why Does it Matter?
Acquiring new customers costs money. By measuring the amount of money it costs to acquire a new customer (Customer Acquisition Cost) against the value that customer brings to your company over their lifetime (Lifetime Value), you can understand if your business model is sustainable. This ratio, known as the CAC/LTV ratio is a vital part of sales data analysis.
How Do you Measure Customer Acquisition Cost?
To measure CAC, you divide the total dollars spent in sales & marketing by the number of customers gained in the period of time that the money was spent.
Customer Acquisition Cost Formula:
$ Spent on Sales & Marketing
New Customers Acquired
What Data Sources Would You Use to Measure Acquisition Cost?
Web based advertising campaigns have made tracking customer acquisition cost much easier. Companies can utilize tags, cookies, and click-through rates to better understand and optimize the true cost of advertising.
Give me an example…
Let’s say that after paying salaries, covering the costs of new customer dinners, and all of your various advertising channels, the total costs over the course of a month spent on sales and marketing is $40,000. In this same month, you acquire 5 new customers. This means your CAC is $8,000.
To understand if this is a healthy number, you also need to understand the total revenue each customer will bring over the course of their expected lifetime with your company, and, the payback period for each customer.
If each of your new customers generates $24,000 net revenue in the first 12 months - your ratio is healthy. If numbers dip lower than that - you may need to optimize your marketing efforts.
What Benchmarks/Indicators Should I Use?
The dollar amount behind acquisition costs will vary greatly depending on your industry, but generally, a 3:1 ratio is considered healthy.
This means your customers are bringing in 3x the amount of money you spent acquiring them. A ratio higher than 3:1 may mean you can increase marketing spend, as you are missing out on opportunities to obtain more customers.
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