Customer Acquisition Cost (CAC) measures the average cost of acquiring a new customer, encompassing sales and marketing (S&M) expenses.
It's a key metric used to evaluate the efficiency of your customer acquisition engine. It's also a tactical tool to allocate marketing budgets, highlighting the cost efficiency of acquiring new customers across channels and campaigns.
When paired with LTV, it becomes a powerful way to assess acquisition efforts' profitability (and therefore sustainability). A high LTV:CAC indicates that the business can invest in acquiring customers and ultimately be highly profitable from those efforts.
At a high level, your CAC can be calculated for any given period as:
It's important to consider your buying cycle or the time it takes for a customer to discover, evaluate, convert, and activate your product. This cycle can vary significantly, from less than a day for B2C products like Instagram to over six months for enterprise products like (you know who).
As a result, what you spend to acquire customers in one period may not result in any actual acquisitions until subsequent periods. Ensure you accurately attribute your Sales & Marketing (S&M) expenses with the corresponding acquisition period to reflect your buying cycle.
Setting that aside, there are multiple ways to look at CAC.
Here, we're considering every ounce of effort and expenditure that went into acquiring a customer. This encompasses all S&M spend—from variable costs like a Google Ads budget to fixed costs, including setup fees and measurement expenses, right down to the overhead costs such as salaries, infrastructure, and tools.
Some other expenses, such as billboards, events, or content marketing, defy straightforward attribution to specific customer acquisitions. Attribution in these cases remains notoriously fuzzy, yet these costs are integral to understanding the full investment required to acquire a customer.
On the other hand, Marginal CAC focuses on what it takes to acquire the next customer through a given channel, accounting only for variable expenses and excluding fixed costs and overhead. It also spans the entire buyer's journey within that channel. For a Search Engine Marketing (SEM) campaign, this includes your cost per acquisition and the commission you paid to the sales rep who talked to that lead.
Marginal CAC is a more actionable tool for demand generation teams, enabling them to make quick, iterative optimizations to improve acquisition efficiency. If your business's fundamentals are healthy, you can use your Marginal CAC as the "tip of the spear" to optimize against, as it's much easier to implement operationally.
We'd advise against optimizing for CAC in isolation. Doing so could cause you to overinvest in cheap but low-quality acquisition channels, which could lead to churn issues down the line. Always account for the tradeoff between acquisition cost and quality by monitoring your LTV:CAC and, if anything, use that as a sanity check to set CAC targets for marketing and growth teams.
Setting that aside, you can use two basic levers to reduce CAC.
Reduce your reliance on paid channels and instead focus on growing organic channels. It's no coincidence that many breakout startups are initially fueled by organic growth with minimal S&M spend. Be on the lookout for early adopters who you can turn into evangelists —word of mouth is a powerful (and nearly free) way to drive organic acquisition and expansion.
You can also boost organic reach by prioritizing (quality) content marketing and SEO. This increases your authority with prospects, keeps you top-of-mind throughout the buying cycle, and reduces overall CAC. It's why we've doubled down on content at Equals.
On the other hand, optimizing conversion rates means more customers with less spend via the same channels. On the sales side, consider ways to streamline and automate the sales cycle to reduce complexity and minimize lead drop-offs between touchpoints.
On the marketing side, you'll want to achieve position-market fit. This involves continuously optimizing how you describe your product, who it's for, and why customers will want it through iteration and testing. Ensure your messaging aligns tightly with the pain points, jobs-to-be-done, and buying triggers of your Ideal Customer Profile (ICP).