Customer Acquisition Cost or CAC is the amount a company spends on acquiring one new customer. This metric helps determine the profitability of investments in promoting an online store. By evaluating CAC in conjunction with other financial indicators, conclusions can be drawn about the effectiveness of business operations, as well as ways to optimize expenses.
CAC should not be confused with another popular metric, Cost Per Action or CPA. CPA calculates the cost of any targeted action, such as a click on an ad, filling out a form, etc. In turn, CAC takes into account only purchases made by new customers, not those who have already made a purchase in the store.
To calculate CAC, you need to take the sum of all the costs that go into attracting customers and divide it by the number of customers. CAC is calculated for individual promotion channels, so customers attracted within one advertising campaign are taken into account in the calculation. It is very important to correctly understand the costs of attracting customers. In addition to direct costs, such as advertising expenses, there are indirect costs that also affect customer acquisition.
When calculating CAC, you need to take into account:
- marketer's salary — as they are responsible for any advertising in the company, their work is included in the cost of acquiring a customer;
- advertising specialist's salary — setting up advertising campaigns is usually done by separate people on staff or freelancers;
- designer's salary — most modern advertising is based on banners and illustrations, so the designer plays an important role in attracting customers;
- operational expenses — additional tools are always needed for normal work, which entails costs, such as a subscription to analytics services, CRM, call tracking, etc.;
- advertising costs — if you have set a specific budget for the entire advertising campaign period, then take it into account, or if you are talking about payments per click, multiply their number by the cost of one click.
These are the main expenses that need to be taken into account when calculating CAC. They may vary depending on the working conditions of the company and the advertising channel through which customers are attracted. Let's say we spent $1200 to attract 75 customers. Then the CAC will be $16. Is this a lot or a little? It depends on other indicators. For example, compare this indicator with the average check. But it is best to compare CAC in the context of LTV — the lifetime value of a customer. LTV will tell you how much you will earn from one customer over the entire history of their interaction with you. Such a comparison will be more correct for CAC because the customer may return to your store again, and their attraction will pay off multiple times.