How to calculate Customer acquisition cost - Definition and formula
Do you know how much it costs for you to get a customer?
While this varies from business to business, finding out your customer acquisition cost is an important part of understanding not only your business expenses but also your target market.
But what exactly is a Customer Acquisition Cost (CAC), and how do you calculate it?
Well, let’s show you!
What is a customer acquisition cost CAC?
Customer acquisition cost refers to the price that it costs to acquire a new customer. It considers how much it takes to attract new customers into them purchasing the business.
Customer acquisition cost is related to another important metric, your customer lifetime value.
Customer acquisition cost formula
Now that we know what customer acquisition cost is, let's show you how to calculate it!
You’ll need a few numbers:
- Cost of sales
- Cost of marketing
- New customers acquired
You’ll also need to set a time period you want to calculate (month, quarter, year etc.)
To calculate your customer acquisition cost, first, you’ll need to add your cost of sales and cost of marketing, then you’ll divide that number by new customers acquired. It should look like this
CAC = (cost of sales + cost of marketing) / new customer acquired
If you don’t know what should be included in your marketing and sale cost here are some prices you should include:
- Ad spend
- Employee salary (marketing and sales team)
- Creative Costs
- Production costs
- Maintenance
So for example, say you spend $100 on sales and marketing and gained 100 new customers for the year. $100/ 100 customer = 1
Your Customer acquisition cost for the year would be $1.00
What is a good customer Acquisition cost?
A good Customer acquisition cost will vary depending on the industry as there are many different factors to consider like
- Life cycle
- Customer lifespan
- Value
- Frequency
Here’s what other websites have said the average customer acquisition cost by industry:
- Travel: $7
- Retail: $10
- Consumer Goods: $22
- Manufacturing: $83
- Transportation: $98
- Marketing Agency: $141
- Financial: $175
- Technology (Hardware): $182
- Real Estate: $213
- Banking/Insurance: $303
- Telecom: $315
- Technology (Software): $395
How to improve your customer acquisition cost
If you calculated your Customer acquisition cost and it isn't close to your industry average or is pretty high for your liking, we recommend following these 3 tips to improve your CAC:
- Increase your conversion rate
- Add more value to the product
- Have a referral program
Closing thoughts
Understanding your customer acquisition cost (CAC) can give you a greater understanding of how much you actually spend to get a new customer.
You should calculate your CAC every so often as it'll change from time to time.
What's your CAC?