CAC (Customer Acquisition Cost)

CAC is a business metric that measures the total amount of money a company needs to spend to acquire one new customer. This includes all costs related to marketing and sales for a specific period.

In simple terms: This is the answer to the question "How much does it cost the company to get me to make my first purchase?".

How is CAC calculated? (The formula)

The formula is very simple:

CAC = (Total customer acquisition costs) / (Number of new customers)

Let's break down the components:

1. Total acquisition costs:
   
   • Marketing costs: All investments in digital marketing (Google Ads, social networks), printed materials, events, PR, external agencies, etc.
   • Sales costs: Salaries, bonuses, and commissions for salespeople, sales software costs (CRM), travel expenses, etc.
   • Technology costs: Marketing automation software, analytics tools, etc. (if directly related to acquisition).
   • Personnel costs: Part of the salaries of people from the marketing and sales departments.
2. Number of new customers: The number of customers who actually made a purchase for the first time during the same period.

Example:

If a company spends 10,000 EUR on marketing and sales for one month and acquires 200 new customers, then:

CAC = 10,000 EUR / 200 customers = 50 EUR per customer.

Why is CAC an extremely important metric?

CAC is not just a number. It is fundamental for making informed business decisions:

1. Measures marketing effectiveness: Shows whether your marketing and sales are working well. A low CAC means you're acquiring customers efficiently.
2. Profitability assessment: This is the key metric that is compared with LTV (Customer Lifetime Value).
3. Decision-making assistance: Helps you decide where to invest your money. For example, if CAC from Facebook Ads is lower than from Google Ads, it might be wise to shift the budget.
4. Business scaling: If you know how much it costs to acquire a customer, you can predict how much money you need to reach a specific growth goal.

The relationship between CAC and LTV (Most important!)

CAC should never be viewed in isolation. Its true value is seen when compared with LTV (Customer Lifetime Value) – the total profit the company expects to receive from one customer over the entire period of their relationship.

Rule of thumb: For a business to be sustainable and profitable, LTV must be significantly higher than CAC.

• Good ratio: It's generally accepted that LTV : CAC = 3:1 is considered healthy. That is, a customer should bring 3 times more profit than it costs to acquire them.
• Bad ratio: If LTV < CAC, the business loses money on every new customer and is not sustainable in the long term.
• "Too good" ratio: If LTV >> CAC (for example 5:1 or 6:1), you might not be investing enough in growth and missing opportunities.

How to reduce CAC?

Optimization strategies:

• Improving conversion rate (CRO): Optimize the website and purchase process to convert more visitors into customers.
• Focusing on quality channels: Invest in marketing channels that give you the cheapest and highest quality customers.
• Improving marketing-sales alignment: Better handoff of potential customers from marketing to sales reduces losses.
• Implementing referral programs: Existing customers acquire new ones at very low cost.
• Increasing customer satisfaction: Satisfied customers become loyal and make repeat purchases (which increases LTV), and advertise for you for free.

Summary