Customer acquisition cost represents how many marketing dollars it costs to get customers to buy your product for the first time. The basic CAC calculation is [Total Marketing Spend]/[Total New Customers].
The lower your CAC is relative to the total amount a customer spends with you over their lifetime (LTV), the better. It means you can potentially increase marketing spend in order to grow and scale your business. If your CAC is relatively high, it likely means you need more optimization around your marketing or that your business needs to depend more heavily on organic marketing (word of mouth, social, SEO)
Given that CAC is a cost, it’s especially important to understand it
in more detail. It’s easy to waste marketing dollars, especially
in digital marketing, where more spend almost always seems to mean
Some additional analysis worth knowing:
- CAC by marketing channel
- Components comprising CAC (cost of traffic, conversion rate, new customer %)
- CAC of the marginal or incremental customer if you increase marketing spend
- Impact of the sales cycle on CAC (it can go down over time with long sales cycles)
- Percentage of marketing spend that is driving repeat customers
For any company that expands through paid marketing channels, it’s imperative to understand CAC and how it evolves as those channels mature over the business’ lifecycle.
If you are planning on raising capital for your business, make sure to know it across all meaningful dimensions. Most investors will assume some portion of the raised funds (especially mid-to-late stages) will be dedicated to marketing. They’ll want to know the funds will be deployed prudently, and knowing CAC is a basic requirement for that.