Customer Acquisition Cost (CAC)
Customer Acquisition Cost refers to how much you pay to gain a single customer. This includes your marketing and sales costs, so any salaries and expenses associated with attracting traffic, converting leads, and closing sales are factored into the equation.
How to calculate your Customer Acquisition Cost:
($) Sales and Marketing Expenses / (#) New Customers Gained = ($) CAC
The cost of acquiring a customer is simply the sum of all marketing and sales expenses (including salary and overhead costs) over a given period divided by the number of new customers added during that same period.
For example, if you spent $15,000 in the past month to acquire new customers (including marketing, sales, salaries, and overhead costs) and had 1000 purchases from new customers, your CAC would be $15.
What we like about Customer Acquisition Cost:
Tracking your Customer Acquisition Cost (CAC) is beneficial to you because it allows you to understand how much it really costs you to acquire a paying customer. If your CAC is higher than expected or you’re unable to monetize your customers effectively, you need to switch things up fast. Either increase your closing rate or boost the value of each transaction.
Also, in addition to tracking your CAC, you’re going to want to keep an eye on your Average Purchase Value or Customer Lifetime Value too. Together, these sales metrics help you understand the sustainability and scalability of your local service business.
What we DON’T like about Customer Acquisition Cost:
Knowing your Customer Acquisition Cost on its own isn’t enough, you need context to make an informed decision. For example, if your CAC is $75 and your Average Order Value is $60, then you have a problem. However, if your Average Order Value is $150, then you’re in good shape.
One thing to note is the sales metric Customer Lifetime Value tracks how much a customer is worth to you during their entire lifecycle. This means it captures recurring revenue, upsells, and cross-sells in addition to one-time sales (which is where most people stop tracking revenue).
So the lesson here is that in addition to tracking your Customer Acquisition Costs, you need to keep an eye on your other sales metrics, so you understand what you need to do next.
Sales metrics similar to Customer Acquisition Cost:
Before you select Customer Acquisition Cost as your One Metric That Matters (OMTM), be sure to check out these related sales metrics and KPIs for context.
• Closing Rate
• Average Purchase Value
• Customer Lifetime Value
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