Customer Acquisition Cost (CAC) is the total cost associated with acquiring a single customer. These are all the costs of a business spent on marketing and sales activities, including everything from marketing and promotion, identifying target markets, acquiring potential customers (suspects, prospects, leads), to costs of selling a product and costs of concluding a contract.
How to determine the CAC?
Revenue per customer differs in different types of business. One customer can bring cents, dollars, hundreds of dollars, but also millions of dollars or more, depending on the size of the customer and the sales volume. In a highly competitive e-shop environment, the margins reach much lower amounts than, for example, when building a nuclear power plant. Therefore, your customer acquisition cost must correspond to the revenue per customer.
Never mind how good your product is. If your customer acquisition cost is higher than the actual amount generated by the customer, then the business will be in loss in the long-term. Therefore, each business must choose a suitable way of acquiring new customers, so the costs are balanced by the future earnings.
Generally speaking, in-person sale is more costly, reaching higher CAC than Internet sales or other forms of sale that allow to reduce the CAC.
How to calculate the CAC?
CAC = MC / CA
- MC is the total Marketing costs
- CA is the total of actually acquired customers
The lower the CAC, the better.
Of course, this formula is indicative because it depends very much on the nature of what the company sells or supplies to customers. When it comes to a one-off sale of goods, then the CA is similar to the number of pieces sold (because the customer buys the goods only once). On the other hand, in the case of services, the relationship with the customer is long-lasting and the revenue may also flow from cross selling, ie sales of other products of the company (for example, banking services, telecommunication services, software as a service - SaaS). When cross-selling, the total revenue that a company will derive from a customer throughout their relationship is higher. However, the cost of maintaining existing customers will also increase.