How to Calculate and Reduce Customer Acquisition Cost

What is Customer Acquisition Cost (CAC)?

Customer Acquisition Cost, or CAC for short, is the average cost of acquiring a paying customer for your business.

Your CAC must be less than the amount of revenue you earn on average from a customer over their lifetime in order for your business to make a profit. So, this is an extremely important metric for any business.

What is The Formula For CAC?

CAC can be calculated by taking the total amount invested in acquiring new paying customers over a certain time period, and dividing by the number of new customers you acquired during that time.

‎So, if you spend $1,000 to close 100 clients, your CAC is 10.

What is an example of a Customer Acquisition Cost?

Let's imagine that Oliver is running a pizza store.

In July, he acquires 1,000 paying customers and spends money on marketing as follows:

• Fees to be featured on two local delivery apps: $500
• Flyers: $200
• Website hosting fees: $30
• Partnership costs: $1000
• Cost to attend a local pizza fair: $100

His total costs associated with acquiring customers are $1,830 for the month of July.

Oliver can, therefore, calculate his CAC as 1,830 / 1000, which is $1.83 per customer.

How does CAC vary across different industries?

CAC benchmarks vary enormously by industry.

For example, according to data by Vena, the average CAC for SaaS businesses in the US is $239.

By contrast, the average CAC for Higher Education companies is a whopping $1,143!

You can also expect substantial variance according to geographical location – especially for businesses that serve a local market, not the entire Internet.

To stick with our previous example, if Oliver ran his pizza shop in New York, the average CAC of his competitors would be far higher than if he ran the same business in Thailand.

There's also a substantial variance between the cost of organic traffic and the cost of paid search traffic.

Sometimes, the former is more, and sometimes it's less. It really depends on the industry and how that industry's customers typically like to purchase.

What is the difference between CPA and CAC?

Cost Per Action, or CPA for short, is similar to CAC but not exactly the same.

In a nutshell: CAC is the average cost of acquiring a paying customer, whereas CPA is the average cost of getting a user to take a certain action.

So, for example, if you wanted to compute the CPA to get users to sign up for a newsletter, you would sum all the costs associated with that action and divide them by the number of newsletter sign-ups for your chosen period.

CPA is often used for specific individual marketing campaigns, whereas CAC is a more global metric that's more commonly applied to a business as a whole.

Breakdown of the Components of CAC

The cost of acquiring new customers includes many components that have a tendency to get overlooked.

To ensure that you don't forget any, here's a list of the most important acquisition costs, all in one place.

Marketing Costs

The easiest type of marketing costs to calculate are the costs of PPC. Whether you use Facebook, Instagram, LinkedIn, or some other platform, each platform will give you the total cost in its respective dashboard – over whatever time frame you want.

Add in the costs of your PPC staff, whether in-house, freelancers, or agencies. And let's throw in all the marketing salaries as well while we're at it since this is likely your highest cost.

The costs associated with content marketing are mostly the salaries of your content team, including people working on SEO and SEM. These might be salaried employees, or you might be paying a cost per blog post or per hour.

Don't forget costs that don't relate directly to content production, such as the cost of link building, social media content, and graphic design.  

Beyond a certain size, businesses sometimes have a budget for attending events as well.

The hardest of all to calculate is the cost of all the tools your marketing department uses. The average enterprise uses an astonishing 120 such marketing tools – so make sure to add them all up!  

Sales Costs

Some teams stop this calculation after marketing costs, but don't forget that your sales team plays an equally important role in helping you sign new customers!

Your highest cost here will be the salaries of your salespeople, who are typically among the best-paid individuals in any business. Remember to include commission and other bonuses as well.

Sometimes, salespeople need to travel to secure deals. If this is the case for your business, include the costs of flights and accommodation here, too.

And like marketing, sales has a pretty large tech stack – including tools like HubSpot and Salesforce. So, for a completely accurate calculation, remember to add in these costs as well.

Operational Costs

Often, users need some kind of support before they're ready to buy.

Your knowledge base is an important expense in situations like this, since it allows customers to answer their own questions without going through a support agent. Tools like UserGuiding are a cost-effective way to create a knowledge base without having to mess around with code.

Alternatively, consider the cost of maintaining an online chat, whether manned by chatbots or support agents (or both).

And don't forget overheads, such as the cost of renting a room for a conference, insuring a product manager for an event she attended, or repairing a printer you use to print flyers. These costs all add up!

Technical Costs

If you acquire a lot of business through your website, consider that there are technical costs associated with keeping it running smoothly. These might cover things like backing up the site, fixing broken links, updating plug-ins, filtering spam, and ensuring adequate uptime.

Medium-sized businesses generally employ a website manager or webmaster for these kinds of tasks, so be sure to include this person's salary, if this applies to you.

In smaller businesses, you might have to estimate the amount of time a more generalist type of employee spends on these activities and pro-rate their salary accordingly.

Promotional Costs

Have you ever used swag to entice a new customer? Perks like free T-shirts, hoodies, and mugs can be great at persuading customers to buy in certain niches.

The only problem is: all these things cost you money! So, make sure to include them in your CAC calculation.

More debatable is the cost of a discount. If you normally sell an item for $100 but give a 20% discount to entice a customer, do you include that $20 in your CAC? Opinions vary on this one.

Perhaps you have a partnership with another company where you pay them 20% for every lead they send you. I've also seen businesses pay companies in related niches to feature them on their integrations page.

Perhaps you're sponsoring an event or two, or maybe you're sponsoring something else, like a YouTube video or blog post.

Either way, all these costs need to be accounted for in your CAC calculation.

Miscellaneous Costs

You might also want to factor in some miscellaneous costs, depending on the time period you choose to measure your CAC in.

There's the cost of market research, which might include conducting surveys or talking to prospective customers.

Or the cost of branding, which could run into the millions if you're a large enterprise. Redesigning your corporate identity, coming up with a new logo and a new name, or migrating your website so that it's more visually impressive – none of these things are cheap.

These costs are more likely to be factored in if you're calculating CAC over a longer time period, as opposed to month to month.

4 Ideas to Reduce Customer Acquisition Cost

There are many strategies you can use to lower your CAC. Here are the most important and effective ones:

1. Focus on Your Ideal Buyer Persona

Lots of companies make the mistake of trying to be all things to all people and selling to just about anyone who's interested in working with them. But you can reduce your CAC significantly by narrowing your focus onto one specific buyer persona.

Notice that I said "one" persona, not more than one. Below an ARR of $1M, it doesn't make sense to spread yourself too thinly and go after more than one persona at once.

The best way to identify your buyer persona is to conduct customer development interviews with your users. Cindy Alvarez has an excellent framework for doing that in her classic book, Lean Customer Development.

Ask them lots of open-ended questions and listen actively. Your goal should be to develop an extremely detailed understanding of how one specific user persona perceives the problem that you're solving.

From there, focus on developing:

• One solution
• For that one persona
• Sold using one marketing channel

To determine the right marketing channel to focus on, you'll again want to talk to your users. Where do they spend time online? What publications do they read?

The more that you narrow your focus onto the right persona, solution and channel, the lower your CAC will be.

Conversely, the more you take a shotgun approach and spread your resources over multiple personas and channels, the more expensive your CAC will be.

2. Improve Your Conversion Rate

You can throw as much money as you want at marketing initiatives, but if no one is converting into a customer, your CAC is going to be sky-high.

To improve your conversion rate, try the following:

• Add trust elements to your website, especially above the fold. These include testimonials, trust badges, logos of prominent brands who work with you, and the number of reviews or followers you have.

• Improve your copywriting. Keep sentences short, focus on the benefits of what you're selling instead of the feature, and use the word "you" liberally so as to speak to the reader directly.
• Experiment with the wording of your CTAs. Conduct A/B tests on your buttons and headlines and see which copy leads to the most conversions.
• Reduce friction from your sign-up process. Allow people to sign up using Google, keep sign-up flows as short as possible, and don't ask for too much user data.
• Use heat mapping software such as Hotjar to figure out where your users are spending the most time on important pages and where they're clicking. Use this data to improve landing page design so that your users are spending time on the areas of the page you want them to be on.
• Improve your page speed. If your site loads slowly, you'd be surprised at just how many people will choose to click away out of impatience.

3. Keep an Eye on Customer Retention

Don't make the mistake of only trying to bring on new customers. It's often much more cost-effective to retain your existing ones – or upsell them a new feature or higher plan level.

The key to boosting customer retention is to improve your onboarding, thereby making your product as seamless and easy to use as possible. This applies most of all to a customer's first few hours inside your product, but it also applies to making new features readily apparent and intuitive to longer-term users.

Here are some actionable ways you can use onboarding to retain more customers:

• Use tooltips to signpost important features.
• Highlight the most critical parts of your product in a product tour.

• Put a help center inside your app so that customers can find help contextually, right next to the features they don't understand.
• Announce new features in-app to user segments who could benefit from those features.
• Conduct in-app surveys to assess how intuitive and valuable customers find certain parts of your product.

By the way, UserGuiding allows you to do all the above – without having to code anything. You can try it out for free and see for yourself!

4. Automate Wherever Possible

It's almost always cheaper to automate a marketing process than to have an employee do it manually. Automation is faster than manual work, so customers get what they want faster – plus it means you can save on the cost of staff.

Here are some examples of processes you can automate to reduce your CAC:

• Send an automated welcome email when someone signs up for your newsletter. Bonus if you can then drip-feed them an automated email sequence thereafter that's relevant and helpful.

• Send an automated thank you email if someone completes an in-app survey, perhaps containing some kind of discount code or goodies.
• Send an automated abandoned cart email if someone clicks away from the check-out page without buying.
• Create a lead magnet that will automatically send customers something of value (like an e-book) in exchange for their email.

Making the Most of Your CAC

So, let's assume that you've calculated your CAC using all the data points that we discussed above.

How do you use that number? How is it valuable for you, besides knowing how much it costs to acquire a customer?

Here are three things you can do with your CAC:

1. Evaluate your LTV:CAC Ratio

Your LTV:CAC ratio provides a snapshot of the health of your business.

You can think of it as the ratio between the average amount of money a customer brings in over their time working with your business and your CAC.

The most important thing to bear in mind here is that this ratio needs to be at least one. Otherwise, you're spending more to acquire a customer than you are receiving from the average customer – which doesn't bode well for profitability.

Received wisdom suggests that a healthy business has a LTV:CAC ratio of at least 3. In other words, you're earning at least $3 for every $1 you spend to bring in a customer.

A ratio of at least 3:1 gives you enough budget to spend on sales and marketing, plus some extra to spend on the product side of the business, plus some profit.

This is a good metric to track on a regular basis, and ensuring it stays at 3:1 or better will make you more attractive to investors.

That being said, companies with a ratio of between 1 and 3:1 can still be successful if they have very consistent pathways for people to become users and very stable LTV values from customers.

2. Measure the CAC Payback Period

The CAC Payback Period tells you how long it will take to recoup the money you invest in acquiring a customer.

This is especially important in the early days of a startup. It's also a number that seasoned investors are interested in because it gives them an idea of how soon they'll be able to see a profit from investing in your business.

To calculate the payback period, take the total CAC for a given time period and divide it by the net new MRR minus the cost of service.

‎This tells you how many months it will take until you break even on the money you invested to acquire a customer.

As a rough benchmark, you want this number to be 15 months or less in order for VCs to consider your company a good investment.

3. Compare your CAC against local industry benchmarks

Finally, it's always helpful to know where you stand compared to the competition.

So Google the average CAC for your industry and see how you measure up.

Unless you're competing for customers globally, ensure you're looking at the local CAC results. This will ensure that the benchmark you look at is representative of your situation.

If you're outperforming the average, congratulations! You're clearly doing something right.

If not, this is a sign that you can work on your CAC using the four pointers that we mentioned above.

Wrapping Up

Having read this post, you should now understand:

• What CAC is
• How to calculate it
• Which costs to include in calculating it
• How to reduce it
• And how to use your CAC once you have it

We hope this has been helpful for you. Good luck on your journey to keep your CAC down!

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