How to calculate CAC
CAC = total sales and marketing costs ÷ number of new customers in the same period
Include ad spend, agency and tool costs, and the salaries of the people involved, or the figure will look better than it is. Many businesses also calculate CAC per channel.
CAC vs CPA
Cost per acquisition (CPA) usually measures the cost of a single conversion in a campaign, such as a lead or a sign-up. CAC measures the full cost of turning someone into a paying customer, across all channels and steps.
What is a good CAC?
Compare it with customer lifetime value (CLV). A common rule of thumb is a CLV at least three times the CAC, and earning the CAC back within about a year. If acquiring customers costs more than they are worth, growth loses money.
How to lower CAC
- Improve conversion rates on your website and in sales.
- Invest in channels that keep working without paying per click, such as SEO, content and referrals.
- Stop spending on channels and campaigns that bring few customers.
- Focus on the customers most likely to buy and to stay.
CAC example
A software company spends 60,000 kr on ads, 30,000 kr on a marketer’s time and 10,000 kr on tools in a month and wins 25 new customers. CAC is 100,000 divided by 25, or 4,000 kr. If a customer pays 500 kr a month and stays 14 months, lifetime revenue is 7,000 kr, so the business gets back more than it spent, though margin and churn need checking.
CAC to lifetime value: the numbers to compare
- LTV to CAC ratio: many businesses aim for lifetime value that is several times CAC. Treat any fixed ratio as a rule of thumb.
- Payback period: how many months of gross profit it takes to recover CAC.
- CAC by channel: shows where growth is cheap and where it is not.
CAC mistakes
- Leaving out salaries or tools and understating the true cost.
- Mixing returning customers into the count of new ones.
- Looking at an average that hides one very expensive channel.
- Comparing CAC across different customer sizes.
CAC FAQs
How can I lower CAC?
Improve conversion rate, grow organic channels, get referrals and focus on customers who stay. See conversion rate and word-of-mouth marketing.