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What is Customer Acquisition Cost?

A business's Customer Acquisition Cost, or CAC, is how much it spends to bring in new clients. The CAC is an important business metric that measures the cost of sales and marketing activities, as well as equipment needed to entice customers.

It is typical to analyze CAC along with Lifetime Value (an estimation of the amount of revenue an account will bring in throughout its lifetime by continuing to buy or subscribe for a longer period) or Monthly Recurring Revenue (the measurement of revenue generation by month) to ascertain whether or not a company is operating efficiently.

What role does CAC play in product management?

Customer acquisition cost helps a business determine the whole value of a customer to the business. It helps with overall ROI calculations for purchases as well.

How is CAC determined?

To calculate CAC, divide the entire cost of customer acquisition (cost of sales and marketing) by the total number of customers gained during a certain period. There are two distinct types of CAC calculations: simple and complex.

Here is an easy method to determine CAC: CaC = MCC/CA

MCC: Total costs associated with acquisition-related marketing campaigns

CA: Total new clients attracted

The challenging method for calculating CAC is as follows: CAC = (MCC + W + S + PS + O) /CAC 

MCC: Total acquisition-related marketing campaign expenditures

W: Wages related to marketing and sales

S: The total cost of marketing and sales software.

PS: Any additional professional services employed in marketing/sales (e.g., consultants).

O: Overhead

CA: Total number of clients acquired

Ways to Reduce CAC

Here are three client-focused techniques for reducing client acquisition expenses and raising profits:

  • Recognize your customers. You may create a product that your clients will adore by being aware of their needs and wants.

  • Engage customers as quickly as you can. Early product participation lowers the cost of client acquisition.

  • Keep bringing them back. Since it costs far more to gain a new user than it does to keep an existing one, provides a positive user experience.

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