Learn how to calculate your customer acquisition cost (CAC) with Traktion's CAC Tool.
What is CAC? CAC stands for customer acquisition cost, which is the unit cost of bringing an additional customer to purchase your product or service.
You need to provide 5 essential metrics to calculate your CAC.
1. Monthly marketing budget: How much do you spend on marketing campaigns per month?
2. Average cost-per-click (CPC): How much do you pay for each click in your marketing campaigns?
3. Conversion rate: What percentage of visitors to your website convert into paying customers?
4. Customer lifetime value (CLTV): How much is a customer is worth to your business over their lifetime?
5. Variable cost per sale: What additional costs, such as labour, SaaS and logistical costs, do you incur per sale?
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CAC is of growing importance to both companies and investors.
It is a poor business decision if you fail to consider your CAC when planning your go-to-market strategy, or when you decide to scale up a particular marketing channel (e.g. Facebook ads).
Understanding what your CAC is helps you understand the potential profitability of your marketing and sales activities, and the scalability of your venture.
Put simply, CAC is the total cost of acquiring your total customers, divided by the total number of customers you have.
If you acquire customers mainly through digital ads, analysing your CAC will allow you to understand which sales or marketing process(es) you need to optimise.
Take note that a high CAC does not mean your business is naturally unprofitable. To understand whether your CAC is justified, you need to compare it against your customer lifetime value (CLTV).
An optimal LTV ratio is naturally much higher than 1.0, as it suggests the value a customer brings to your company far exceeds the cost of acquiring a customer.
To put this into perspective, assume that you are a D2C e-commerce subscription startup, and your CAC is £50.00 while your monthly subscription is only £30.00
At first glance, this might look as if that your company is unprofitable.
However, if an average customer stays subscribed for 5 months, your CLTV is actually £150.00, which suggests a LTV/CAC ratio of 3.0x. This means that you can usually justify a high CAC if your LTV is high, either by increasing your average order value, or the length of your customer relationships.
Segmenting your CAC across different marketing channels allow you to understand which channel is more profitable for you.
These marketing channels include:
- Google AdWords
- Facebook and Instagram Ads
- Display Ads (such as Google Display Network)
- Affiliate Advertising
- New advertising platforms, such as TikTok
- Unpaid marketing channels, such as blogs (content marketing) and search engine optimisation (SEO)
To calculate the channel-specific CAC, simply divide the marketing budget spent on that channel, divided by the number of customers (conversions) attributed to that specific channel.
Once you have figured out each channel's CAC, you can rank and prioritize your marketing channels and decide which channel deserves a greater allocation of your marketing budget.
On channels such as Google Ads, you might be limited in scale, as your reach is typically constrained by the keyword volumes related to your offering.
Platforms such as Facebook, however, provide technically near-infinite reach, as you target customers based on different demographic factors. The possibilities are almost endless.
1. Lower your cost-per-click (CPC) by testing your ad creative, copy and targeting options
2. Improve your conversion rate through A/B testing on your site and optimising your funnel
3. Reduce your variable cost per sale through new marketing automation technologies and cost-efficient CRM
1. Hire a paid ads specialist: You can access the world’s best marketing talent through Traktion. All PPC and paid social freelancers on our platform have been pre-vetted by experts. Our specialists understand the importance of keeping CAC low by optimising your ad funnels. It takes just a few minutes to submit a hiring brief.
2. Use Traktion’s dashboard analytics: Traktion’s Smart Dashboard consolidates all your data from Facebook, Google and other analytic tools into 1 place. This ‘mission control’ gives you a bird’s eye view of how your campaigns are performing. Access to our dashboard is complimentary when you hire a freelancer via Traktion.
3. Hire a conversion rate optimisation (CRO) specialist: Traktion’s pre-vetted CRO specialists have extensive experience in A/B testing, data analytics, and on-site optimisation. An increase in conversion rate from 0.5% to 1.0% can double your revenue.