Customer Acquisition Cost (CAC) calculates the total cost of acquiring a new customer. Companies use this to measure how efficient they are at bringing on new clients.
Acquiring a customer without spending any resources or effort isn’t likely. Often, a significant amount of money goes into acquiring customers, and this adds up fast.
Ideally, you’ll be able to keep the cost of attracting a new customer—or customer acquisition cost—low so your profit margin is high.
In this article, you’ll learn fundamental information about customer acquisition cost (CAC), including:
- The formula to calculate this metric.
- What a good CAC looks like in different industries.
- How to keep your customer acquisition cost low.
- The data you need to collect from different teams to calculate CAC.
What is Customer Acquisition Cost (CAC)?
CAC is the total cost of acquiring a new customer. This includes all marketing and sales expenses and other costs incurred during the acquisition process. CAC is a fundamental business metric because it directly impacts profitability and returns on investment (ROI).
If you spend more to acquire a client than the average client brings to your business, you will have an unsustainable negative ROI.
Importance of CAC
To further demonstrate its importance, here are four ways CAC influences your business:
Budget Allocation
When you can define your CAC, you can use this number to make strategic decisions about spending money on marketing and sales efforts.
A CAC is powerful because a business’s executive and decision-making teams can make more informed adjustments on where they should spend their money versus investments that aren’t paying off.
For example, let’s say you determine that one marketing channel has a lower CAC than others. You could then reduce acquisition costs in channels with a higher CAC and reinvest in those that provide value.
CAC is also a good way to find which customers fit your target audience the best so you can focus on them.
Pricing Strategy
When determining the pricing strategy your business will use for products and services, CAC will help you choose prices that sufficiently cover acquisition costs.
Depending on your financial performance, this sometimes means increasing prices while reducing costs. It comes down to balancing a competitive price point and a sustainable growth rate for your CAC.
Business Valuation
Customer acquisition cost also plays a part in business valuation. Investors and stakeholders will look at CAC to assess the efficiency of the company’s growth strategies.
A low CAC (different in every industry—we’ll explore this in a moment) can signal to investors that your customer acquisition costs are efficient and promote your company’s profitability.
On the other hand, if CAC is relatively high in the industry, this can concern investors and stakeholders.
Profitability Analysis
CAC indicates whether a business can sustainably buy customers who generate sufficient revenue.
A company can determine whether it will recoup its investment by comparing CAC to a customer’s lifetime value (LTV). The LTV should be significantly higher than the CAC to ensure long-term profitability.
Average Customer Acquisition Cost by Industry
What classifies as a “good” metric varies from industry to industry.
What is a Good Customer Acquisition Cost?
A good CAC is one where the cost to acquire a customer is significantly lower than the customer’s lifetime value (LTV).
This determination depends on the typical sales cycle, a customer’s average lifetime value (LTV), competition levels, and your marketing channels.
That being said, a general rule of thumb can give you a precursory understanding of your CAC: a 3:1 or higher ratio of customer lifetime value (LTV) to CAC.
For every dollar spent on acquiring a customer, you should expect to earn three dollars in return over the customer’s lifetime.
Understanding the average CAC in your industry gives you valuable benchmarks for gauging the efficiency and profitability of your customer acquisition strategies.
How Much Does It Cost to Acquire a New Customer?
Below, you’ll see average industry CACs and the unique factors influencing this metric. FirstPageSage analyzed 29 B2B industries to collect this data.
They break the numbers down by organic (SEO and organic social marketing) and inorganic CAC (paid marketing, including PPC) and provide an average of these costs. Importantly, they do weigh the combined average CAC by 75% organic and 25% inorganic.
They also note that due to insufficient data, these numbers do not include CACs for:
- Email marketing
- In-person events
- Direct mail
- Outdoor advertising
- Other forms of lead generation
eCommerce
- Organic CAC: $87
- Inorganic CAC: $81
- Combined Average: $86
As you will see, eCommerce CAC is much lower than most other industries. This lower cost is often due to the high volume of online sales and the effectiveness of digital marketing channels in reaching and converting customers.
However, within the eCommerce industry, these numbers can vary even more. For example, the average CAC for toys/hobbies/DIY is $59, while the Average for eCommerce jewelry CAC is $91.
SaaS (Software as a Service)
Combined Average: $701.59
FirstPageSage breaks down SaaS CACs into 22 different industries. The numbers listed above are the combined averages of their data.
Within this data set, fintech has the highest CAC at $1,451, while eCommerce SaaS has the lowest, at $277.
Higher Education and College
- Organic CAC: $862
- Inorganic CAC: $1,985
- Combined Average: $1,143
These costs reflect the significant investment in higher education to compete for student enrollments. We can attribute the higher CACs to the extensive marketing and engagement efforts necessary to attract prospective students and convince them to enroll.
Financial Services
- Organic CAC: $644
- Inorganic CAC: $1,202
- Combined Average: $784
Financial services companies often invest heavily in marketing and compliance to attract and retain customers.
These numbers vary widely depending on the specific business model and target market.
IT and Managed Services
- Organic CAC: $325
- Inorganic CAC: $840
- Combined Average: $454
These CAC values reflect the competitive nature of the IT and managed services market. These companies are faced with balancing cost-effective organic strategies with targeted inorganic efforts to attract and retain clients.
How to Lower Your Customer Acquisition Cost
You want to fall on the lower end of the spectrum when it comes to your industry’s average CAC, but how do you keep these costs down?
Here are six strategies to lower CAC:
1. Data Consolidation
If your data is spread across multiple spreadsheets and data systems, it is significantly more difficult to get a clear picture of your financial data, including your customer acquisition efforts.
FP&A software offers robust tools for consolidating data into a single platform. Then, you can more effectively analyze and optimize your marketing strategies.
This consolidation can help identify the most cost-effective channels based on the most accurate, real-time information, allowing you to allocate your budget more efficiently.
It also helps you solve the problem of data silos when you’re trying to get this data from different departments.
2. Optimize Marketing Channels
To lower CAC, focus on the marketing channels with the highest ROI. Once you have ascertained which channels yield the highest ROI, allocate more of the marketing budget to those channels.
For instance, if social media advertising drives the most conversions at the lowest acquisition costs, you might spend on those campaigns and pull back in other areas.
3. Improve Conversion Rates
Optimize your website and sales funnel to acquire more customers without spending more money. Focus on optimizing the user experience, streamlining the checkout process, and using compelling copy and visuals.
You can also use A/B testing to identify what works and what doesn’t to increase sales.
4. Retargeting Campaigns
Retargeting or remarketing is re-gaining the attention of someone who has previously engaged with your business in some way.
Retargeting ads can remind them about what you offer and how it can help them and convert them to buyers. In most cases, this helps achieve lower CAC, as your ads target people who already know your brand as opposed to finding clients who don’t know about your business.
5. Leverage Customer Referrals
Implement referral programs to encourage existing customers to bring in new ones. Offer incentives like discounts, free products, or other rewards for successful referrals. Referral programs can significantly reduce CAC by leveraging existing customers’ trust in their network.
6. Content Marketing
Along with your paid ad spend, invest in content marketing that attracts organic traffic and lowers paid advertising costs. This lowers your customer acquisition costs over the long term.
FAQs on Customer Acquisition Cost
Here are a few more questions about the cost of acquiring a customer.
How much does it cost to acquire a new customer?
This depends on the industry you’re in and the business model you use.
For example, the average CAC of an engineering business is $512 versus $187 for a pharmaceutical company. These variations represent the difference in money, assets, and resources spent to win and convert customers.
What is an example of a customer acquisition cost?
A medical device company spends $5,000 on marketing and $7,000 in sales within a certain time frame and gains 50 new clients in that time.
To calculate this company’s CAC, we divide (the cost of sales + the cost of marketing) by the number of new customers.
That looks like this:
($5,000 + $7,000) ÷ 50 = $240
This means the medical device company spends an average of $240 to acquire each new customer.
What is the difference between CPA and CAC?
Cost per acquisition (CPA) accounts for any lead or customer action (e.g., sale, signup, registration, free trial), whereas CAC measures acquiring a paying customer.
CPA is a more flexible metric than CAC, as it can be used to direct marketing goals besides customer acquisition.
Access the Data You Need to Lower Your CAC
If you track and measure your Customer Acquisition Cost (CAC), you can make strategic decisions to manage it and ensure your venture’s growth and profitability.
Lower CAC with high customer lifetime value leads to a successful venture.
Rely on Datarails for the data consolidation and financial reporting you need to make business decisions.
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