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Alphabet Soup: CAC

Posted By Ed Rooney Ed Rooney Posted On Mar 28 2021 at 06:32 PM Mar 28 2021 at 06:32 PM

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This spoonful of Alphabet Soup lets us know what it costs to acquire a new customer or client. CAC stands for Customer Acquisition Cost which is a measure that gives us a window into understanding how much is being paid out in the name of attracting new business.

Consider all the costs that go in to reaching a new customer

In a nutshell, to calculate your CAC you consider all the costs that go into reaching that customer. Examples include:

  • Your advertising budget
  • Your sales team
  • Your marketing team
  • Your production costs

Taking a period of time you then can calculate the cost of a new customer by dividing the total cost by the number of customers acquired during that time period.

This number is useful if you are evaluating the effectiveness of multiple channels and can run the channels numbers against each other by representing the number of new customers as those attributed to each channel. 

It is also useful to calculate the CAC with and without headcount. In some scenarios such as web-heavy business ventures there may be value in understanding the cost as it pertains to just the infrastructure costs supporting customers.

Another value in understanding the cost of customer acquisition comes from understanding another business measurement, the Lifetime Value of a customer (LTV). It is not unheard of to have a business startup fail because these two numbers were out of whack. 

The lifetime value of a customer can be considered as:

average value of a purchase X the number of annual purchases X average length of customer relationship (in years).

Some businesses fall victim to optimism about either the lifetime value of a customer or the cost of acquiring one. Having a pulse on these numbers can help with avoiding that fate. The longer a business has been in existence the more likely these numbers become reliable indicators of the health of the business in general. People who know better than us ( David Skok - Startup Killer: the Cost of Customer Acquisition ) recommend a 3 to 1 ration of CAC to LTV for businesses running a SaaS model.

Retail businesses have an average CAC of $10 while marketing firms clock in at $141 per customer on average. Software technology businesses pay upwards of $395  [sourrce: DemandJump]

Having a pulse on CAC for online retailers is critical, especially in crowded, competitive spaces.