What is customer acquisition cost?
Customer acquisition cost metric measures the amount an organization has to spend in order to acquire or bring in new customers.
It takes into consideration all the costs related to sales and marketing efforts, as well as property or equipment, needed to convince a customer to buy a product or service.
How to calculate customer acquisition cost?
To calculate customer acquisition cost, divide the ‘total expenses to acquire customers’ (taking into consideration all the expenses to acquire the customer – marketing, software, salary, overhead, additional services) by the ‘number of customers acquired’ in the period the money was spent.
Formula for calculating customer acquisition cost
Real-life example of customer acquisition cost
Let’s assume you run a micro SaaS business. You rolled out a marketing campaign to acquire new customers. The campaign costs you $500 a month. And you acquired 100 new customers during the same month as a result of your marketing efforts.
Plugging the data into the formula, your customer acquisition cost (CAC) will be: 500/100 = $5
This means, you had to spend $5 on average to acquire one new customer.
What’s considered a good customer acquisition cost? (benchmark)
Most businesses benchmark their customer acquisition cost (CAC) against customer lifetime value (CLV). A CAC:LTV ratio of 1:3 is considered good and anything higher than this is great.
However, the industry you operate in affects your customer acquisition cost. The average customer acquisition costs also depend on the age of your business. For example, you might see a higher CAC when your marketing is just getting off the ground in a new market since it requires increased up-front investment.
Jordan T. McBride of ProfitWell writes: “The best rule of thumb is to be spending 33% or less of your customer's lifetime value.”
SaaS companies usually has an average acquisition cost of $205 and the education industry has the highest average CAC with $862. The selective nature of higher education probably explains this.
Ways to reduce your customer acquisition cost
- Make existing customers stay: Acquiring a new customer is 5 times as expensive as retaining an existing customer. So, focus a large part of your efforts on retaining existing customers.
- Improve on-site conversions: A/B split testing with new checkout systems and setting up goals on Google Analytics can help you reduce shopping cart abandonment rates as well as enhance site performance by improving landing pages, site speed, mobile optimization, and other factors.
- Employ a CRM system: You can use CRM software to keep track of your customers, their movements through your marketing funnel, and how much they spend, streamline processes, and improve profitability
Also Read: Related Metrics
- Net Promoter Score
- Customer Churn Rate
- Customer Lifetime Value
- Customer Retention Rate
- Repeat Purchase Rate
- Customer Satisfaction Score (CSAT)
- Renewal Rate
- First Contact Resolution Rate (FCR)
- Free Trial Conversion Rate
- Daily Active Users (DAU)
- Monthly Active Users (MAU)
- Average Revenue Per User
- Referral Program ROI
- Upsell Rate & Cross-sell Rate
- Viral Coefficient
- Participant Share Rate
- Invitation Conversion Rate
- Net Dollar Retention
- Product Adoption Rate
- Sessions per User