Customer acquisition cost (CAC) is the cost of acquiring new customers. This includes the costs of the product itself, research and marketing to convince a potential customer to take action.
One huge advantage of knowing your CAC is being able to figure out the importance of a customer to your company – if your CAC is higher than the Lifetime Value (LTV) of a customer, you’re going to lose profits.
Your CAC can also be used to calculate your marketing return on investment (ROI), shedding more light on the profitability of your marketing channels. Once you’ve discovered the channels with the lowest CAC, you are able to use this information to increase your profit margins.
Simply put, your CAC is calculated by adding each of the costs of customer acquisition together and dividing it by the number of customers you’ve actually acquired;
Customer Acquisition Cost = Total Costs / Customers Acquired
The customer acquisition cost calculator above takes the hard work out for you. Simply gather and input the information regarding your costs of customer acquisition and the number of customers you’ve acquired for the year and the CAC calculator will calculate the rest. The customer acquisition cost formula used in the CAC calculator lets you add individual costs separately to ensure you haven’t left anything out.
A high customer acquisition cost shows that you’re not converting enough customers for the amount being spent to entice them. This is why so many startups fail – without knowing your CAC, you can’t make the necessary adjustments to your customer acquisition efforts to maximise efficiency and profit.
If you have used the customer acquisition cost calculator and found your CAC is too high, there are some steps you can take to lower your CAC and improve your profit margin.
Take steps to increase your conversion rate if you find your potential customers are not taking action on your website. Check your pricing model and subscription plan to ensure its bringing in new customers with offers such as a free trial or rebates. Make use of referral programs and free channels in order to reach a wider audience.