How To Calculate The Customer Acquisition Cost (CAC)

When startups don’t have a clear understanding of their Customer Acquisition Cost (CAC) in the first couple of years, one of the biggest challenges they face is unsustainable cash burn. Without knowing how much it truly costs to acquire a customer, startups often overspend on marketing and sales, which can quickly drain their resources.

This can lead to running out of capital before they even reach profitability, making it harder to scale or secure additional funding. But what exactly do we refer to when we talk about the Customer Acquisition Cost? ProductPlan defines it as a way to measure the total cost of sales and marketing efforts, as well as the property or equipment needed to convince a customer to buy a product or service.

One of the first steps to sustainable growth lies in an accurate CAC calculation. By getting this right, you’ll be able to make your customer acquisition efforts more efficient as your business scales.

In today’s guide, we’ll walk you through how to calculate CAC, helping you refine your strategies and boost profitability.

Navigating the Numbers – A Strategic Approach to Calculating CAC

1. Define a period of time

   Select a time frame for your CAC calculations, whether it’s a month, a quarter, or a year. This helps you focus on a specific period, keeping the data relevant and ensuring you're working with up-to-date information.

   
   

2. Include All Relevant Costs

   Make sure to include every expense related to acquiring a customer, such as marketing costs, sales team salaries, advertising spend, software tools, and any other overhead. It's important to be thorough, as overlooking costs can lead to inaccurate calculations.

   
   

3. Separate Retention Costs from Acquisition Costs

   While both are important, CAC should focus solely on the expenses related to acquiring new customers. Keeping these costs separate will give you a clearer understanding of the true cost and effectiveness of your acquisition strategies.

   
   

4. Calculate Your CAC

   The formula is really simple, add up all of your marketing expenses, sales expenses, then divide the total by the number of new customers you acquire.

   
   

   

   
   

5. Compare CAC With Customer Lifetime Value (CLTV)

   A strategic CAC calculation isn’t just about cutting costs. It’s about making sure your CAC remains lower than your Customer Lifetime Value (CLV). By monitoring this balance, you can avoid overspending and ensure your growth stays sustainable.

Strive for a balanced ration to maximize profitability. Ideally, you should aim to recover your customer acquisition costs within a year, with a target CLTV ration of 3:1. This means that each customer’s lifetime value should be, ideally, three times the acquisition cost.

Not calculating your Customer Acquisition Cost (CAC) can lead to several challenges. It can result in overspending on marketing and sales, poor budgeting, and delayed profitability, making it harder to scale.

Without knowing your CAC, you miss the chance to optimize your customer acquisition strategies and improve efficiency over time. Your pricing strategy may suffer, as you won’t know if you're covering acquisition costs or potentially losing customers by pricing too high.

Calculating your Customer Acquisition Cost (CAC) brings several advantages. It helps you manage your marketing budget more efficiently and focus on the most cost-effective strategies. With a clear view of your CAC, you can accelerate your path to profitability and make informed pricing decisions that cover your costs. Ultimately, knowing your CAC allows for better decision-making and sets your business up for sustainable growth.

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