FACT: All businesses gain customers (to various degrees, of course).
FICTION: All businesses know how much they spend to acquire these customers.
From my years of experience in sales & marketing, I can confidently tell you that many businesses, regardless of size, do not know how much it costs them to acquire each new customer.
A common thought process is that as long as they're gaining customers, things are good. NOT TRUE! I also hear arguments that their sales/marketing processes are "different," or "complicated," so calculating something like CAC is not possible.
To be candid, this is total BS.
Any business can and absolutely should leverage this metric. No business is so "different" that they can't understand how much they're spending to gain new customers. If you think your company fits in this "different" bucket, this article was tailor made for you!
Let's take a look at what CAC is, why it's important and how to find your company's own CAC.
What is Customer Acquisition Cost (CAC)?
In short, your Customer Acquisition Cost is the metric that shows the total average cost your company spends to acquire each new customer.
Given that it reveals how much your company is spending to acquire a new customer, the lower this number is the better.
It's a pretty simple formula but it requires you to know some important numbers regarding your sales and marketing spend. We'll cover that in a bit.
Why CAC is Important
Your CAC sheds light on far more than just the dollar amount you spend to gain a customer. In fact, your CAC also provides strategic insight into key business processes and performance, such as:
The efficiency of your marketing program
A high CAC may mean that your marketing program is spending a lot of money to acquire fewer customers. This is often attributed to poor targeting, inconsistent messaging, antiquated outbound strategies and/or a slew of other stuff. (We always recommend inbound marketing to drive greater organic performance.)
The efficiency of your sales process
If marketing is solid, high CAC may also mean that your sales process is squashing the leads delivered by marketing. This could be the result of inconsistent follow-up, inexperienced reps, improper goal/quota setting, ambiguous prospect-facing expectations, etc.
The ability of your company to effectively scale
Lacking control over your CAC is a lack of control over your business. Inevitably, it shows a poor marketing and sales alignment, which is an absolute momentum killer. You can't confidently predict how best to hire new staff, implement new technologies or expand your product/service offering if you're unsure about just how much your spending on customer acquisition. This is because your CAC directly impacts your profits.
The ability of your company to maximize profits
As mentioned above, your profits are directly affected by your CAC. Know these numbers and you will get a step closer to knowing your future!
How to Determine Your CAC
Alright, so enough scary stuff. Let's get to the math. Fortunately, this is a very simple formula! To determine this metric, you'll need to know the following two numbers broken down by each month, quarter & year:
- TOTAL SALES & MARKETING COST = all program expenses + staff salaries (including commissions & bonuses) + overhead.
- NUMBER OF NEW CUSTOMERS = you guessed it, the number of customers you've gained!
Now, here is the formula to determine your Customer Acquisition Cost:
Sales/Marketing Costs ÷ New Customers = CAC
Boom, that's it! You've now uncovered one of your most important marketing metrics!
Beyond Your CAC
While knowing your CAC is critical, it's not the only metric you need to know. There are also other important metrics, like your Marketing Percentage of CAC, your Ratio of Customer Lifetime Value to CAC, Time to Payoff of CAC, etc.
Master these marketing metrics and at the end of the day, you will become a wiser, more efficient and ultimately more profitable company.