COST OF CUSTOMER ACQUISITION OR CAC: A LIFE-CHANGING BUSINESS METRIC

Unlike pay-per-click, conversions, return on investment, and many other marketing terms, the concept of CAC (Customer Acquisition Cost) may not be familiar to a business owner. However, this metric is extremely important. Along with LTV (Lifetime Value), this metric defines the effectiveness of the sales funnel and shows the business’s success and its appeal to investors.

What Is It About?

• What is CAC, and how do you calculate it?
• Why determine the cost of acquiring a customer?
• What is the difference between CAC, CPA, and CPL?
• What is considered an optimal customer acquisition cost?
• How can you improve your CAC?
• Conclusion

What Is CAC, and How Do You Calculate It?

The cost of customer acquisition (CAC) is the amount spent to get new customers divided by the number of those customers. The numerator includes advertising costs, employee salaries involved in a specific campaign, and software or other tools used to increase the customer base.

The cost of acquiring customers is calculated using the formula:

CAC = MCC / CA, where MCC—the total amount spent on advertising, CA—the number of leads attracted.

This is a simple method of calculating costs. The complex method involves detailing expenses, meaning that MCC is divided into several components:

• W—salaries of marketing specialists;
• S—payments for software, e-commerce services, automation, analytics, etc.;
• PS—costs for external specialists, including PPC experts, copywriters, targeting specialists, etc.;
• O—organizational and additional expenses, such as office supplies, web hosting fees, and so on.

It is recommended to determine CAC (Customer Acquisition Cost) separately for each promotion channel. It is important to consider only new leads and not include repeat customers who have already made purchases from you.

This analysis helps evaluate the effectiveness of different platforms and campaigns, allowing you to exclude methods that do not deliver the desired results and allocate the promotion budget accordingly.

Why Determine Customer Acquisition Cost?

Regular calculation of CAC helps monitor the effectiveness of your marketing strategy, make timely adjustments to the sales funnel, and improve communication with your target audience. To accurately assess this metric, you should consider the total number of purchases a customer makes during their relationship with the company.

Determining CAC helps achieve several important goals:

• Identifying Key Revenue Sources: If the CAC for Instagram is $200 and for Facebook is $500, it becomes clear which social media platform deserves more resources.
• Attracting Investors: Along with ROI, CAC is a key criterion for investors. They are more likely to invest in companies where customer acquisition costs are significantly lower than the revenue generated.
• Evaluating Marketing Department Performance: This metric helps identify irrelevant keywords and exclude ad campaigns that attract visitors who are not interested in the product.
• Improving Pricing and Product Range: As you work on lowering CAC, you can review pricing, enhance the product, or introduce additional offers.
• Simplifying Compliance with Privacy Laws: Tracking CAC makes life easier for advertisers and business owners as privacy regulations become stricter.

Regarding the last point, the cost of acquiring leads is now more important than ever. According to recent research, CAC has increased by 60% in recent years. This is due to the end of third-party cookies and the launch of iOS 14.5.

Previously, a consumer would always see relevant ads in their browser after abandoning a shopping cart or visiting a specific content page. Now, obtaining data to track user attribution has become more challenging or even impossible. Marketers find it harder to assess the effectiveness of sales funnels and capture targeted leads.

CAC is now a concern for those who never paid attention to it before, as finding or re-engaging interested users has become much more difficult.

Another challenge for advertisers is Apple’s release of iOS 14.5, which includes expanded privacy protection. The tracking permission request reduces access to app installation and attribution data, complicating targeting and personalization.

What Is the Difference Between CAC, CPA, and CPL?

There are two metrics related to CAC that also deal with customer costs. These metrics are often confused or considered the same.

CPA (Cost Per Action)—The cost per action or cost per conversion. It determines the cost for each conversion that is not a purchase, such as signing up for a demo, registering on the website, or joining a social media community.

CPA = Total Campaign Cost / Number of Actions

For example, if 50 users download a free mobile app as part of a campaign with a budget of $100, the cost per action (CPA) is $100 / 50 = $2. This metric is mainly used by companies with multi-stage sales funnels, such as subscription services.

CPL (Cost Per Lead)—The cost per lead. This model considers leads as potential customers who are close to making a purchase.

CPL = Promotion Costs / Number of Leads

While CAC focuses only on new customers who have made a purchase, CPA and CPL focus on leads rather than buyers, making them similar. The difference is that CPA involves immediate conversion and payment, such as a click-through and a charge in Google Ads, while CPL represents the cost of a lead who has not yet converted.

CPL, on the other hand, is the cost per lead that is expected to bring profit in the future—possibly in a few weeks or months. At the same time, the conversions themselves are usually more valuable: the lifetime value of a lead is higher, and the product can be more complex and expensive.

What is the Optimal Customer Acquisition Cost?

A good CAC is a relative concept. It should be evaluated considering specific business factors such as the average order value, customer lifetime value, the company’s growth stage, scale, and goals. Even for a small store in the first weeks of operation, it is essential to cover costs. This is necessary to continue business activities. In general, the CAC is considered profitable if the LTV/CAC ratio is greater than 3.

“Keep an eye on CAC to make sure it doesn’t get out of control. For example, no rational company will spend $500 to acquire a new customer with an expected LTV of $300 because this will result in a loss of $200 in value per acquired customer.”—“Customer acquisition cost”, Wikipedia

However, the interpretation of the results depends on the context. For example, investments in advertising in a new region may not bring the desired results initially but may pay off later. Consider the algorithms of the platforms you use for promotion and the nuances of marketing methods. For instance, during the early stages of growing organic traffic, visitors may only read content and not make purchases. Plus, scaling efforts require the work of SEO specialists, content managers, copywriters, etc.

It is a mistake to consider slow methods unprofitable. However, if you are looking for quick ways to increase sales, focus on paid methods where CAC can be clearly defined and, if necessary, the strategy can be adjusted.

When it comes to dealers, dropshippers, and other collaborations between manufacturers and sellers, it is essential to consider the markup on products. From the figure obtained by dividing sales costs, the amount allocated to the supplier should be subtracted.

We recommend analyzing CAC along with LTV. If a customer is a brand advocate and makes purchases regularly and over a long period, a high CAC is not a problem. After all, a customer who stays with the company for years only needs to be acquired once. However, remember the possibility of losing loyal customers over time. This factor can be influenced, but it will still decrease CAC to some extent, especially if the number of products in the store is limited, and after a certain period, the customer no longer needs to buy from you.

If we are talking about one-time purchases through aggressive advertising or sales (according to the instant conversion model, CPA), the normal CAC should not be high, as the costs of acquiring a lead must pay off immediately.

How to Improve CAC?

You can improve customer acquisition costs by building trusting and long-lasting relationships with customers, solving their problems, and clearly explaining the product’s features.

“A CAC of $10.00 can be relatively low if customers spend $25.00 each week for 20 years! However, this e-commerce company struggles to retain customers; most make only one purchase. If you know which channels have the lowest acquisition costs, you know where to focus your marketing spend. The more you allocate your marketing budget to channels with lower CAC, the more customers you can acquire for a fixed budget.”—“Customer Acquisition Cost: How to Calculate, Reduce & Improve It”, Chase Hughes

There are several common ways to improve CAC:

Increase Website Conversion

Website audits, improving usability and navigation, using chatbots, and informative sections like “About Us,” “Delivery,” “Payment,” and “Warranty”—all these contribute to converting leads into paying customers. If possible, launch landing pages for the most relevant products, as their conversion rates are significantly higher.

Answer Questions

The more you explain the service or product features on the website and in other marketing materials, the fewer questions there will be during phone calls. If you currently attract new clients through free consultations, try replacing this offer with a ready-made solution, such as a guide or checklist. This saves managers’ time and reduces phone costs.

Large marketplaces answer common user questions in a special seller help center, making it easier and faster for new visitors to get familiar with the platform’s features. This approach allows online consultants and customer service managers to have more time for tasks that are more important than providing round-the-clock free consulting.

Onboarding

The process of explaining the main value of a brand or a specific product to the target audience is essential in the service industry and for IT products with a free version. Showing the value of paid features helps prevent losing customers when they switch to a new pricing plan. You can prepare users for the first payment through email newsletters, interactive in-app tips, or short explainer videos.

Reviews

If a satisfied customer leaves a positive review on social media, in an email, or on the company’s Google profile, feature it on your website. User-generated content, especially in video format, builds trust with potential customers and turns visitors into buyers.

Make sure the reviews tell stories about how your product solves problems for the target audience. This type of storytelling is effectively used by the marketplace amazon.com.

Up-sell and Cross-Sell

Another advantage of marketplaces is the presence of an informative product page. The “Frequently Bought Together” section is used to increase the average order value. Cross-selling and offers with more expensive, premium variations of the product or service improve the CAC metric because a new customer acquired at the regular price pays more at once.

Ad Optimization

If, according to analytics, people visit the website or social media page but don’t take any action, the traffic is likely not targeted. In this case, adjustments should be made in the ad account settings to narrow down the target audience. Negative keywords or new offers might be necessary.

Comparisons and Reviews

On the website apple.com/ua, there is a separate page for comparing different smartphone models. This simplifies the customer journey, makes product selection easier, and at the same time increases website conversion and lowers CAC.

Lead Retention

If a visitor has visited the website, added a product to the cart, or even requested a consultation or a lead magnet, but then there is silence—focus on bringing them back to the website. Considering the restrictions on third-party cookies and the new privacy rules introduced by iOS 14.5, it’s essential to think about retaining all clients without exception.

Create valuable content related to the product, add people interested in your ads to communities, and generate entertaining content. If a potential client temporarily has no funds or simply lacks the desire to make a purchase, you won’t lose them if you keep them interested with something free.

“By simply focusing on customer retention, you can completely change the profit margin of your company. Research shows that increasing customer retention by 5% can boost profits by 25-95%.”—“Customer Acquisition Cost: How to Calculate, Reduce & Improve It”, Chase Hughes

Google Analytics and other analytics tools, along with CRM systems, can help you automate the client acquisition process and make it more efficient.

Conclusions

By determining the cost of acquiring a customer in your business, you can assess whether you’re moving in the right direction. Without understanding CAC and LTV, you might be spending money on an audience that doesn’t bring full profitability to the company.

Use this metric to analyze each marketing channel—it will help you allocate the ad budget effectively. At the same time, don’t completely abandon less effective sources, as different acquisition channels often complement each other.

CAC includes the ad budget, employee and contractor salaries, software, inventory management, supplier markups, and other costs. When calculating, consider the specifics of your business, as the CAC metric may be temporarily high in some cases.

Additional sales and customer lifetime value.Upselling, premium products, subscriber discounts, and improving customer interaction through other means can increase the average check and customer lifetime value, positively impacting CAC.

Frequently Asked Questions