How to calculate how much it costs to acquire new customers

Understanding your customer acquisition cost (CAC) is crucial for sustainable growth. But many companies struggle to accurately measure and optimize this key metric. 

In this guide, we'll break down exactly how to calculate CAC, what to include, and strategies to reduce it over time.

What is CAC?

Customer acquisition cost (CAC) measures how much your company spends to acquire new customers. This includes all sales and marketing costs associated with convincing a prospect to make their first purchase. 

Typically, CAC is calculated as an average across all new customers acquired in a given time period.  

Tracking CAC allows you to measure the efficiency of your acquisition efforts. It provides insight into how much you're spending to grow your customer base and whether your client acquisition strategy is cost-effective.

Want to try our CAC calculator?

Get a sense for how much you're spending per customer with our simple CAC calculator. Just drop in your sales & marketing costs, and we'll tell you your average cost per new customer.

Why is CAC important? 

Your customer acquisition cost enables you to assess the profitability of your acquisition strategy by comparing CAC to customer lifetime value (LTV) — the revenue that a customer will generate for your business over the course of their engagement with your brand. 

CAC also helps you evaluate the ROI of different marketing channels and campaigns. In addition to a broad monthly CAC, you can also calculate the acquisition cost for specific channels, such as paid ads on Instagram or Google search campaigns.

Your CAC also informs pricing strategy to ensure you can recoup acquisition costs. As you grow, CAC trends indicate if your customer acquisition model is sustainable. 

It’s also a good idea to compare your CAC to industry averages, ensuring that your acquisition efforts are cost-effective within your market sector.

Ignoring your CAC can lead to unsustainable growth and cash flow issues. Many startups fail when they spend too much on acquisition without a clear path to profitability.

How to calculate CAC

The basic formula for calculating CAC is to divide the total cost of sales and marketing by the number of new customers acquired. 

If you spend $100,000 on sales and marketing in a month and acquire 1,000 new customers, your CAC would be $100 per customer. 

This gives you an average CAC across all channels. For more granular insights, calculate channel-specific CAC by dividing the total cost for a channel by the number of customers acquired through that channel.

To get a more complete view of your CAC, it’s a good idea to include all of your associated expenses in the calculation.

What to include in CAC calculation

Your CAC calculation should account for all of the costs associated with customer acquisition. Factor in the salaries of your marketers and sales associates. Include expenses like the wages of marketing freelancers, commissions for sales reps, and recurring CRM subscriptions.

Marketing tools and software costs should be factored into your CAC calculation. This includes expenses for CRM systems, email marketing platforms, social media management tools, and analytics software. Don't forget to include content creation costs, such as freelance writers, graphic designers, and video production expenses.

Events and sponsorships related to customer acquisition should also be accounted for — trade show expenses, conference fees, and costs associated with hosting webinars. Any promotional swag used for lead generation falls into this category as well.

If you're using agencies or consultants to support your acquisition efforts, their fees should be included as well. 

Some companies include a portion of overhead in their customer acquisition cost calculations. This might be a percentage of rent, utilities, and admin costs. Base it on the proportion of employees in acquisition roles.

Remember, every expense tied to winning new customers affects your CAC. And accurate CAC calculations lead to better customer acquisition strategies.

LTV to CAC comparison

Once you've calculated your CAC, you can weigh it against your LTV to see if your customer acquisition strategy is sustainable and profitable in the long run. 

As a general rule, you should aim for an LTV to CAC ratio of at least 3:1. This means that over their lifetime, a customer should generate at least three times the cost it took to acquire them.

To calculate LTV, multiply the average purchase value by the average purchase frequency and the average customer lifespan. 

So, if a customer spends an average of $100 per purchase, buys from you 4 times a year, and remains a customer for 3 years, their LTV would be $100 x 4 x 3 = $1,200.

If your CAC is $300 and your LTV is $1,200, your LTV to CAC ratio would be 4:1, indicating a healthy and profitable customer acquisition model. 

However, if your CAC is $600 with the same LTV, your ratio would be to 2:1. That means you may need to optimize your acquisition costs or increase customer value to improve profitability.

Target LTV-to-CAC ratios can vary by industry and business model. Software-as-a-Service (SaaS) companies might aim for higher ratios due to their subscription-based revenue model and potential for long customer lifespans. 

How to reduce CAC

Reducing your CAC can significantly improve your profitability and scalability. These strategies can help you optimize your customer acquisition model and lower your costs.

Implement a referral program

Encourage your existing customers to refer new clients. Referral marketing typically has a lower CAC than other acquisition channels because it leverages the trust and relationships your customers have with their networks. 

Referrals are highly effective. They’re 50x more likely to convert prospects than low-impact recommendations like advertisements. Plus, referred customers are 200% more likely to spend than non-referred customers.     

You could consider offering incentives to both the referrer and the new customer, like Casper. Their double-sided referral program generated 7x more ROI than any other marketing investment.   

Improve your customer targeting

Personalized advertising can reduce customer acquisition costs by up to 50%. Refine your ideal customer profile and focus your marketing efforts on the most promising prospects. This reduces wasted spend on low-quality leads unlikely to convert. 

Continuously test new marketing channels and compare their CAC. You may discover more cost-effective ways to reach your target audience. Don't be afraid to cut underperforming channels and reallocate budget to those with the best ROI.

Use data analytics and customer segmentation to identify your most valuable customer segments and tailor your messaging accordingly. 

Optimize conversion rates

Enhance your website and landing pages to improve conversion rates. This could involve A/B testing different layouts, copy, and calls-to-action. The higher your conversion rate, the more efficient your marketing spend becomes, effectively lowering your CAC.

You should also look to reduce friction in the customer journey. In the e-comm world, that might mean simplifying your checkout process, offering guest checkout options, or providing multiple payment methods. 

Leverage content marketing

Invest in creating high-quality, valuable content that attracts and engages your target audience. Content marketing can be a cost-effective way to generate leads and nurture them through the sales funnel. 

This approach can result in lower CAC compared to paid advertising, especially over the long term. While harder to measure short-term, a strong brand reduces CAC over time through increased organic traffic and word-of-mouth referrals. Loyal customers are worth 10x as much as their first purchase.

Implement lead scoring

Segment and score your leads to ensure that you’re allocating your resources effectively. 

With behavioral segmentation, you can group leads based on their actions (i.e. website visits or content downloads). And, with a lead scoring system, you can prioritize leads based on their behaviors.

An online fashion retailer might assign 5 points for newsletter signups, 15 points for adding items to a wishlist, and 30 points for abandoned carts. A lead with 50 points could be considered highly interested and receive a personalized discount offer, while a 20-point lead might be sent style guides to nurture their interest.  

Invest in brand building

While harder to measure in the short term, building a strong brand can significantly reduce CAC over time. A recognizable and trusted brand often results in lower acquisition costs through increased organic traffic, word-of-mouth referrals, and higher conversion rates.

For example, Airbnb's "Live There" campaign shifted focus from just booking accommodations to experiencing destinations like a local. The company created immersive video content and personalized city guidebooks, emphasizing unique, authentic travel experiences. 

This strategy differentiated Airbnb from traditional hotels and online travel agencies. As a result, Airbnb saw a 20% increase in bookings. By aligning their brand with the desire for authentic experiences, Airbnb fostered an emotional connection that increased word-of-mouth referrals and attracted new customers.

Conclusion

Understanding and optimizing your cost of acquiring new customers is crucial for long-term success. Be sure to regularly track CAC and LTV across different segments to refine your acquisition strategy over time.

Referral programs often deliver high returns at a relatively low CAC. Our reward-sending platform can help you implement a scalable referral program with no added fees.   

Ready to improve your acquisition efforts and reduce CAC? Book a demo with our team today to see how Tremendous can boost your marketing ROI.