How to find the Customer Acquisition Cost (CAC)?
By James Bell
- Finance , Higher Level Management , Metrics and Ratios , SaaS ,
- 23 Nov
Customer Acquisition Cost is the average cost that it takes to get a customer. You can look at this as an aggregate total, per sales channel, by product, or any other way that makes sense.
It’s important to know how much it costs to acquire a customer. In firms with a high churn rate, you’ll want to keep your CAC very low. If your business has a very low churn rate, it may be worth the addition cost to acquire them. While you don’t want to leave money on the table, you need to keep in mind how growth curves are shaped as products and industry mature. The further down the curve you go, the more the law of diminishing returns comes into play.
Customer Acquisition Cost
![\[ CAC= \frac{\Sigma{Marketing Costs} + \Sigma{Sales Costs}}{\Sigma{New Customers}} \]](http://stumptownfin.com/wp-content/ql-cache/quicklatex.com-dcb6d4a7c888ad780bb58bf492ac34fb_l3.png "Rendered by QuickLaTeX.com")
where
Customer Acquisition Cost
Total Marketing Costs for the Period
Total Sales Costs for the Period
Total Number of New Customers
Customer Acquisition Cost
This is the cost to acquire new customers. It is based off of aggregate amounts so this is a very high level metric. You can take any metric like this and add dimension and record other values so that you can drill down or slice your view of the data in different ways. For instance you can parse this out by product line, bundled offerings, department, sales channel, etc.
Total Marketing Costs for the Period
This is the total cost for the sales department for the period.
Total Sales Costs for the Period
This is the total cost for the sales department for the period.
Total Number of New Customers
To scale data better, separating these into channels in your data warehouse helps as sales become more complex. This helps segment your customers so that you can better understand how your CAC changes based on individual offerings, packages, regions, and more.
Other Considerations
Of course there are other costs and expenses that go along with a companies business. For this metric, we are looking at a very specific part of what it costs to get a customer. Another consideration is the quality of a customer. If you know a certain customer profile is more sticky or has a greater opportunity to increase Total Lifetime Value through up-selling, then it may be worth to put more efforts towards building a relationship with them.
Other considerations include the game theory aspect of looking at a Porters 5 forces analysis. There may be market share or other strategic reasons that justify higher CAC’s in a competitive environment.