What's Customer Acquisition Cost (CAC) & How to Reduce It?

The most successful marketing teams don’t make decisions about customer acquisition based simply on whether or not an action will earn them a customer. Yes, the ultimate goal of a customer acquisition strategy is to acquire customers, but an effective customer acquisition strategy is distinguished by much more than just the speed or quantity of customers attracted. Successful customer acquisition efforts are a combination of many different considerations and moving pieces. One of the most important factors that are often overlooked is customer acquisition cost.

Suppose a marketing team plans an acquisition strategy solely around attracting as many customers as possible. In that case, they may create attractive short-term outcomes, but they’ve also forgotten to account for long-term sustainability. Each customer’s cost of acquisition mustn’t be so high that the company runs out of resources before the customers have had time to generate any revenue for the business. Keeping customer acquisition cost at the forefront of the discussion when planning an acquisition strategy can help your marketing team plan for sustainable growth.

Let’s dive deeper into the concept of customer acquisition cost and answer some important questions like “why is customer acquisition cost important?” and “what is a good customer acquisition cost?”

What's Customer Acquisition Cost (CAC)?

Let’s get the most foundational question out of the way first: what is customer acquisition cost?

Customer acquisition cost is an estimation of the amount of money it costs your business to gain each new customer. There are many different efforts that contribute to customer acquisition costs, meaning things like advertising costs, marketing expenses, sales expenses, marketers’ salaries, and more need to be factored into the calculation.

CAC vs. CPA

Customer acquisition cost is often confused with cost per acquisition — even though these two terms sound nearly the same, they are very different. CAC measures the cost of acquiring a paying customer, whereas CPA measures the cost of acquiring a user who hasn’t paid anything, such as a lead or a registration on your website.

Why’s Customer Acquisition Important?

Calculating your business’s customer acquisition cost is a very important part of planning your business’s growth strategy. You need to gain new customers to grow, but faster growth isn’t always a good thing. It’s important to pace your company’s growth sustainably so you don’t find yourself sinking more money than you can afford into a customer base you don’t have the resources to support.

Instead, it’s usually much smarter to plan a sustainable growth strategy by looking at your customer acquisition cost and considering how quickly you can afford to grow your business. If you can’t afford to grow as quickly as you would like, it may be time to find ways to lower your customer acquisition cost. However, before we share a few ways to reduce your business’s acquisition cost, let’s take a closer look at how to actually calculate customer acquisition cost.

Customer Acquisition Cost Formula

In order to track your business’s customer acquisition cost and factor it into your marketing strategy, you’ll need to know how to calculate customer acquisition cost. You will be calculating your CAC for a specific period, so the first piece of information you need is the period you’ll be using. For example, you could calculate your customer acquisition cost for a month or quarter. 

Once you know which period of time you’re examining, the next step is to identify everything that went into your total marketing expenses during that time. These could be expenses like sales and marketing salaries or the total cost of advertisements. After you’ve determined every source of expenses that contributed to your business’s marketing outcomes during the time period in question, the final piece of information you need is the total number of paying customers your business acquired during that time period. Then, you’re ready to calculate your average customer acquisition cost.

The customer acquisition cost formula is:

Total sales and marketing expenses / # of new customer acquisitions = CAC

Let’s look at a customer acquisition cost example: if you spent a total of $12,000 on sales and marketing last month and acquired 22 new customers, your customer acquisition cost calculation for that month would look like this:

$12,000 / 22 new customers = $545.45 per customer

Another metric that’s commonly related to CAC is LTV (customer lifetime value). People sometimes wonder, “what’s the difference between CAC vs. LTV? You can almost think of customer acquisition cost as the opposite of customer lifetime value. While CAC measures the money required to obtain a customer, LTV measures the amount of revenue the customer will ultimately generate for your business throughout the entire time they are a customer of your business. For a business to be profitable, it’s essential that customer lifetime value outpaces customer acquisition cost by as much as possible. 

How To Lower Customer Acquisition Cost

Now that you know how to calculate CAC, you can plug your business’s numbers into the formula and determine your own business’s customer acquisition cost. Once you have your number, your next question will surely be: what is a good CAC? The answer to this question is enormously dependent on the industry your business operates within. A “good” customer acquisition cost varies wildly from industry to industry, ranging from 10 dollars or less per customer in the travel or retail industries to several hundred dollars per customer in finance or technology-related industries. The average customer acquisition cost for SaaS businesses is estimated to be around $395 per customer.

Understanding your industry’s average customer acquisition cost can help you decide if your business’s CAC is acceptable or if you need to make efforts to lower it. If your average customer acquisition cost is not significantly lower than your average customer lifetime value, it’s usually a good idea to try to lower your customer acquisition cost. As a general rule, the ratio of each customer’s LTV to CAC should be approximately 3:1. If you need to widen the gap between your business’s customer acquisition cost and average customer lifetime value, here are a few tips you can use to lower CAC:

1. Understanding the Customer

One of the best ways to lower customer acquisition costs is to increase your understanding of the customer. A customer-centric acquisition strategy prioritizes what the customer wants and needs in order to attract their attention effectively. It can be helpful to target your marketing efforts toward demographics that are as specific as possible. The more specifically you target your customer acquisition strategy, the higher chances you have of delivering messages that get results. This can be more cost-effective than pouring a lot of money into broad strategies that achieve low conversion rates. Personalized marketing interactions are almost always more likely to drive conversions.

2. Drive Product Engagement

You can also lower customer acquisition costs by boosting product engagement. Customers who take longer to make up their minds about products require higher investments of resources to convert. The longer the buying process, the more marketing experiences your marketing team needs to create for the customer. 

For example, a customer who converts after reading a single piece of content was a much less expensive acquisition than a customer who read two pieces of content and saw three social media ads before deciding to give your product or service a try. Investing in engaging marketing experiences and making your product as accessible as possible to potential customers can greatly reduce the effort (and therefore cost) required to gain their business.

3. Prioritize Retention

Focusing your marketing efforts on customer retention can also benefit your customer acquisition cost. Retention is one of the primary drivers of customer lifetime value, and logically so — the longer amount of time a customer spends with your business, the more chances they have to make purchases and generate revenue. Therefore, keeping customers around for as long as possible is crucial to increasing your average customer lifetime value. While increasing LTV is not technically the same as lowering customer acquisition cost, it will often have the similar result of widening the gap between LTV and CAC. If your customers are generating more revenue for your business on average, it can offset a higher-than-average CAC.

A great way to improve product engagement and customer retention is to invest more heavily in customer education. You can use a learning management system (like Northpass) to power a robust, online customer academy where your customers can access resources to help them succeed with your products or services. Equipping customers with resources like these can lead to higher engagement and retention rates.

Customer acquisition cost is one of the most useful metrics you can track to help you plan your marketing strategy. Why is customer acquisition cost important? Your average customer acquisition cost tells you how quickly your business can afford to grow. It’s essential to balance customer acquisition cost against customer lifetime value to ensure your customer acquisition strategy is sustainable. Even though it might seem like the best idea to simply pull in as many customers as possible as quickly as possible, this would not be a sustainable growth strategy for many businesses. If you want to be able to support more rapid growth, you can use tactics like learning more about your customers, boosting product engagement, or improving customer retention to lower customer acquisition costs.