CAC stands for Customer Acquisition Cost. It is the metric that tells us the cost of acquiring a new customer. It is a unit metric based on the average cost per new customer, helping us make extrapolations that allow us to better understand how the business works. This basic metric is one of the most widely used in online businesses because it is closely related to customer acquisition, as shown in the following infographic.
Each customer we acquire has to go through a series of steps, although not all of them reach the end. In this way:
- The ad is viewed by a series of potential customers (impressions)
- Of all those potential customers, some will click to reach the website (clicks)
- They will show interest in the product we offer (leads)
- Finally, a percentage of them will decide to buy (customers)
How to calculate CAC
Using the data obtained through web analytics and also considering marketing spend, we can create a table like the following:
This table includes not only economic metrics, but also conversion metrics, which will help us better understand how the conversion funnel is working.
The formula to obtain CAC is the following:
The only difficulty in all this lies in knowing how to identify the money invested in marketing, so it is normal for questions like these to arise:
To deal with this difficulty, the best approach is to use common-sense criteria that are consistent with the rest of the cost allocations. Above all, remember to keep those same criteria over time so that you can compare results. Do not forget that the purpose is to check whether we are improving or getting worse.
As our project progresses, it is advisable to refine the values used in the CAC calculation to adapt it to the different channels we use to acquire customers. This way, we will obtain a table like the previous one, but specific to each channel.
All this information will help us choose the best mix of digital channels for our business based on data.
If you want to calculate your fundamental metrics and run simulations, use the Traction Validator.
CAC for the entrepreneur
Know the future marketing investment
Once you discover the acquisition cost of a customer, you will be able to calculate the money you will need to invest to acquire new users. The formula is the following:
Let us look at an example. If each customer we acquire costs us $27 (CAC) and we want to acquire 2,300 more, we would need to invest $62,100, the result of multiplying 27 x 2,300.
These data will also be useful if we want to outsource marketing. That is, if in the search for those 2,300 new customers we use Google Adwords with a conversion rate of 1.9%, we could obtain 121,053 users from our target audience with a CPC cost of $0.51.
Remember that the formula 0.019 = 1.9 customers / 100 users means that for every 100 users we obtain 1.9 customers.
If we still do not know our CAC, remember that by knowing the revenue per user, you can estimate the marketing investment you need to make.
Extrapolate data when scaling
As we have already seen, knowing the unit cost allows us to extrapolate the results to understand the marketing investment needed when scaling, for example if we wanted to acquire 2,300 new customers. However, we must keep in mind that reality will cause CAC to increase as customer volume grows. Each time, we will have to look for those customers further away, in other places and by doing different things to reach them.
Know the traction capacity you have
The goal of gaining traction is to make our small-scale business model repeatable, sustainable, profitable and scalable.
Therefore, to know whether your business has traction, it is essential to understand the relationship between the cost of acquiring a customer (CAC) and the money that customer contributes (CLTV). If you want to go directly to the section to learn more, click on the CLTV vs CAC section, although I recommend that you keep reading.
Uses of CAC for the investor
The CAC metric is a very useful tool for the investor, as it helps analyze and understand how the business works.
Compare the data on the marketing investment required
Knowing CAC and the calculations shown above, the investor will be able to identify whether there is consistency between what the entrepreneur claims to achieve and the resources that will be needed.
Identify the health of the business
Just as the entrepreneur can understand the traction capacity of the startup, the investor can also identify the business possibilities.
Therefore, we can say that the relationship between CLTV and CAC will give us the necessary indicators about the health of the business. See the CLTV vs CAC section by clicking on it.
How CAC can be improved
Recalling the CAC formulas, we realize that everything depends on two factors: the conversion rate from user to customer (% conversion) and the money invested per user in acquisition channels (CPC), such as Adwords, banners, social networks and so on.
That is, since CAC is the relationship between these two metrics, we will need to work on both conversion and channel cost to improve it. We must keep in mind that it may be worth bringing in more expensive users if their conversion rate is higher. That is why we insist so much on the importance of optimizing the relationship between both factors instead of optimizing each one separately.
Improve channel costs
To improve marketing costs in user acquisition, we must optimize each of the channels being used. Specifically, we will optimize when the cost per user is close to the desired target and change radically when that cost is far away.
Soon we will focus on how to improve acquisition in a new section, as it is vitally important, not only for startups but for any business.
Improve conversion
In the digital world, improving conversion is closely related to the user motivation to achieve what the startup proposes, such as acquiring a specific product or learning a language, how easy it is to achieve it, and the call to action for conversion into a customer.
Because of the importance of this topic, we will discuss how to improve conversion in a new section.
Calculate whether your business is really growing
Is your business really growing?
Understanding a specific metric is important. But no metric, on its own, tells you whether your business is moving forward or not. The Traction Calculator lets you put all your metrics into context and make decisions with judgment.
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Series: Fundamental Metrics for Startups and SMEs
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