Customer Acquisition Cost (CAC)

Every company must engage in advertising and marketing and create some market presence in order to make sales. Even service companies that rely completely on referrals and introductions have a brand identity to allow their future customers to do their own research before engaging.

That is a fixed cost of doing business – a website, branding, perhaps even some active social media activity to show competence and expertise.

Targeted Marketing campaigns, payments for leads, SEO, the sales process itself (time and cost on preparing quotations, negotiations, contracts) are then variable costs. Commissions, discounts and referral costs should also be included as a CAC.

CAC is then simply the cost divided by the number of sales. A good marketing team will calculate CAC for each channel or campaign to identify what works best (and test alternatives against each other), which will require tracking a customer progress through to sale to understand where the sale originated.

Analysing costs and attrition rates at each stage of the pipeline (or funnel) will help to show whether there are broken stages in the progression and how to improve CAC.

This is why it is so much cheaper to sell to an existing customer than to a new one, so good customer management can reduce this down to the cost of a simple regular engagement. There has been a trend to create subscription models to reduce the need to resell for products that are consumed regularly (razor blades, toilet paper, pet food…).

This results in a calculation of Customer Lifetime Value. Total profit from one customers’ transactions less the CAC is the profitability of that engagement. It can be worth spending a bit more to win good customers than to over-promise and under-deliver and experience a high churn rate that results in constantly having to find new customers.