Customer Acquisition Cost (CAC) is the cumulative cost of sales and marketing endeavours that are required to gain a customer. In other words, CAC evaluates the cost of transforming a potential lead into a customer. This metric helps to determine business profitability as it examines the funds a business spends on pulling customers against the number of customers they indeed achieved. It is a critical factor that determines whether a business is viable; if it can generate profits by keeping acquisition costs sustainably low.
FORMULA TO CALCULATE CAC
CAC can be calculated by using the formula below:
HOW TO CALCULATE CAC?
To calculate CAC, we must first identify the time frame that we are assessing for in terms of a month or quarter or year. Next, we need to add together the cumulative marketing and sales costs and divide that total by the number of new customers achieved during the time frame. These will give us the estimated cost of acquiring a new customer.
For example, a business spends $400,000 on sales and $200,000 on marketing. The company acquired 500 new customers during the last six months. To calculate the CAC:
CAC = ($400,000 + $200,000)/500
Hence, the cost of acquiring a customer for that period of 6 months would be $1,200.
The CAC can be analysed against other key business metrics to unseal meaningful perspicacity about the business sales, customer service and marketing campaigns.