Customer Acquisition Cost: What It Is and How To Improve It

By Indeed Editorial Team

Updated October 4, 2022

Published February 25, 2020

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

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Businesses commonly use analytics like customer acquisition cost (CAC) to determine how much it might cost to gain new customers based on specific marketing plans. CAC can give a business insight into what marketing strategies are working and if they cost more than they pay. Understanding what CAC is and how to use it can help you track the cost of gaining new customers more accurately and improve your ability to reduce costs for a business.

In this article, we discuss customer acquisition cost, describe how to calculate it and examine some methods that can help reduce the total CAC a company might incur.

Key takeaways:

  • Customer acquisition cost (CAC) is a calculation to determine how much a business spends to gain a new customer during a certain period.

  • CAC requires that you know the total marketing costs and the total number of new customers for the period.

  • CAC paired with cost per acquisition (CPA) can help a company determine its overall profitability.

What is customer acquisition cost?

Customer acquisition cost refers to the cost of getting potential customers to purchase a company's products or services. It's possible to include the cost of marketing strategies that businesses use to track leads as they progress through the buying cycle.

CAC is also a metric for the total costs spent on marketing and other means of convincing leads to become paying customers. CAC can show a business where certain lead generation and marketing methods are working to attract customers and what strategies may not be working. This can help businesses determine which methods are worth the cost to generate customers.

Related: 7 Effective Customer Acquisition Strategies

What makes up CAC?

When you calculate CAC, there are several costs to consider, including:

  • Advertising costs

  • Marketing and sales salaries

  • Technical costs

  • Publishing costs

  • Production costs

  • Inventory upkeep

Related: Customer Acquisition: Definition, Channels, Cost and Steps

How is CAC used?

Businesses typically use CAC to determine profitability. Companies can use CAC to compare the amount of money spent on attracting leads to the number of customers gained from those leads.

If the cost to gain new customers is higher than the number of actual customers gained, this can show that more is being spent on costs like advertising, marketing and paying sales and marketing employees than is being generated as revenue. If a business's CAC is higher than what it earns in revenue for a long period, this can cause the business to lose money and could lead to a shutdown.

While the primary use of CAC is to measure profitability, it can also compare to the cost per acquisition (CPA) used when converting leads to paying customers. CPA can tell a company how much it spends on attracting interested leads.

If it converts those leads to paying customers, CAC is then used to derive the total cost of gaining those customers. CPA and CAC can both be used to determine how profitable a business is and how well it's turning leads to paying customers without overspending on advertising, marketing and other methods of acquiring customers.

Read more: 8 Steps To Create Successful Social Media Marketing Strategies

How to determine customer acquisition cost

Determining CAC involves combining all the advertising, marketing and other costs associated with gaining new customers and dividing it by the number of customers gained during a specific period. Below is the formula for CAC and an example of using it:

CAC = (Total cost of marketing and advertising) / (Total number of customers gained)

Example: The total cost of advertising and paying sales and marketing teams amounts to $50,000 for the fiscal year and a company gained 1,500 new customers during that time. To find out how much it actually spent to gain each customer, the teams insert their values into the CAC formula to get this equation: 

CAC = $50,000 / 1,500

This results in approximately $33 spent to gain each customer in that fiscal year.

The costs and number of customers are for the same period. For instance, in the example, the period was a year, but the business may calculate its CAC on a monthly, quarterly or biannual basis.

Read more: How To Use the Customer Acquisition Cost Formula in 4 Steps

Ways to improve customer acquisition cost

When a business spends money on strategies and methods that convert leads to buyers, it can use CAC calculation to determine how much it spends compared to how many customers it gains. Higher CAC can show unnecessary spending and methods it can eliminate or improve.

The business can implement strategies to lower those acquisition costs. Reducing CAC means that the business is spending marketing funds more efficiently and can experience higher returns in its total profit.

The following approaches can help improve or reduce the total CAC a company spends:

1. Define the target market

Defining your target market is one way to analyze and evaluate your methods of acquiring new customers. For example, if a business sells dog toys, it would define its target market as people who own or love dogs.

By defining the market, the business can break down the larger dog owner market to those customers that have small or large dog breeds. This information can help improve the business's CAC because it can implement specific advertising and marketing strategies that cater to each defined target group.

A customer with a small dog breed may receive ads for small dog toys while customers with large breeds receive ads for large dog toys. This can help lower the total CAC because the business is spending on specific strategies that reach its defined market rather than spending on general strategies that would attract any market including dog owners or not.

Related: Defining Your Target Audience: What It Is and Why It's Important

2. Perform split tests

Another strategy that can help improve CAC is to perform split tests. Split tests, also known as A/B testing, comprise implementing a specific strategy, tracking its progress, then analyzing the results of the strategy. For example, a company that implements a sales funnel page might perform split testing on the ability of the funnel page to convert leads to buyers.

First, they would implement the funnel page and then track its performance by measuring the cost of maintaining the page versus the number of customers it converts. If the funnel page appears to be failing at converting leads, the company can analyze these results to evaluate how to improve the funnel page or whether to eliminate the page.

Related: What Is Split Testing for Websites? (And Why It's Important)

3. Increase conversion rates

Improving CAC can also involve increasing the conversion rate of leads to paying customers. Conversion rate represents the ratio of leads to buyers and can tell a business how many customers it gains for every lead that visits its product site, sales or funnel pages.

Increasing the conversion rate means increasing the number of paying customers from interested leads. When a business increases its conversion rates, it can lower its total CAC because more customers are converting to buyers than leaving the product or sales pages.

Read more: How To Calculate and Optimize Your Conversion Rate

4. Implement marketing automation

Marketing automation can also be an effective tool for improving CAC. You can automate content, social media, email and other digital marketing strategies with software that can track, measure and analyze all the aspects of a customer's purchasing cycle.

This data can tell marketing teams which methods are costing too much, which methods are working and which methods the team can end to help reduce total CAC and other expenses associated with acquiring and retaining customers.

Related: Marketing Automation: Definition, Tips and Examples

Example of calculating CAC

Below is an example of how to calculate CAC:

A company called Mark-X sells parts and components to private aircraft collectors. The company has a defined market of people who own collectible airplanes but it breaks down its target market into smaller groups categorized by the make and model of aircraft they own.

This helps Mark-X cater to specific markets when advertising its products. The company wants to avoid overspending on marketing strategies, so its marketing team implements streamlined approaches to reach each target group. The marketing team projects the total costs for a six-month period at $110,000, including marketing automation and marketing team salaries.

The marketing team starts an email marketing campaign, a content marketing plan and a social media strategy to help the company reach more leads and conversions. The team executes each campaign and plans to track its metrics for six months. After six months, Mark-X evaluates the results of the strategies used and calculate the total costs for the period. The calculation might look like this if the company gains 1,000 new customers for six months:

CAC = $110,000 / 1,000 = $110

This means that the company spends $110 on each customer acquisition

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