When making marketing decisions, it is important to consider metrics. Metrics are used to tell marketers about a company’s performance, how their marketing efforts are performing, and what their marketing dollars are producing in terms of revenue or new customers. One of the most important metrics for marketers to monitor is the CAC, or Customer Acquisition Cost.
What is Customer Acquisition Cost (CAC)?
In short, CAC is a metric used to determine the total average cost your company spends to acquire a new customer. According to marketing expert, Neil Patel, “CAC is the cost of convincing a potential customer to buy your product or service.”
Why is Customer Acquisition Cost important?
It is essential for any business to understand the importance of the customer acquisition cost because CAC is the metric used to determine whether a company is generating enough revenue to cover the overhead and keep the business running.
How is it calculated?
CAC is calculated by taking your total marketing expenses and adding it to any additional marketing expenses, including salaries, commissions, and bonuses, within a specific time period and divide it by the number of new customers acquired within that same time frame.
Total Marketing Expenses + Total Sales Expenses = The total amount of money spent on marketing, marketing research, promotions, commissions, bonuses, salaries, and overhead for a specific amount of time.
Number of New Customers Acquired = number of new customers acquired in the same time frame used above.
For example, if a company were to spend $20,000 in total marketing and sales expenses, and they acquired 40 new customers, the customer acquisition cost would be $500.
A company in any industry needs to track their metrics and customer acquisition costs. In doing so, a company will see better results and growth. When a company understands how to calculate customer acquisition cost, it can compare the CAC to other metrics within your company such as Customer Lifetime Value (LTV) to determine how to make adjustments and improve its cost of customer acquisition and increase revenue.