December 17, 2020
Customer Acquisition Cost: What is it and what’s a good one?

One metric that all entrepreneurs need to know is their customer acquisition cost, or CAC. CAC is the amount it costs your business to attract a potential customer and convert them into a paying customer. 

This number is important because it tells you how much money you’re spending to bring in business, and how effective your marketing and sales efforts are. To run a sustainable business, your customer acquisition cost should be lower than what customers are spending with you. If you’re not already measuring CAC for your business, you should start! 

A simple way to calculate customer acquisition cost for a certain time period is:

Total Marketing & Sales cost in that time period ÷ New customers acquired in that time period

Here’s an extremely simple example:

In November, a business spent $3,000 on marketing and sales. This was the total cost of their online and print advertising. The entrepreneur did everything else themselves, so they didn’t count any labor costs in this total. 

They acquired 200 new customers that month. 

So, $3,000 / 200 = $15 acquisition cost. 

It’s important to note that CAC is not the same as cost per click (CPC) or cost per action (CTA), two metrics you might see or calculate if you run online advertising campaigns. The total cost of your online ads will be part of the total marketing costs that go into your CAC calculation. 

As with most metrics, you can get more granular with this calculation, and the specific costs you include will vary based on your business and your industry. Because of this CAC can vary wildly between industries, and there’s no way to prescriptively say “$x is a good CAC, and anything higher is bad for business”. 

In fact, in our research, we found it extremely difficult to find public information about average CAC across industries. The most specific information we found was from a 2013 article that shared these averages:

  • Travel: $7 (Priceline.com)
  • Telecom: $315 (Sprint)
  • Retail: $10 (Barnes and Noble)
  • Financial: $175 (TD Waterhouse)

Another 2017 article shared these averages:

  • Consumer Goods: $22
  • Manufacturing: $83
  • Transportation: $98
  • Marketing Agency: $141
  • Financial: $175
  • Technology (Hardware): $182
  • Real Estate: $213
  • Banking/Insurance: $303
  • Technology (Software): $395

As you can see, an industry’s average CAC can be in the single digits, but oftentimes it can go up to the hundreds of dollars. In our experience, enterprise B2B software businesses can have a CAC in the high hundreds to thousands of dollars, which is justified by a high customer lifetime value, or LTV. We’ll talk more about LTV in a future blog post. 

If you’re just getting started calculating CAC for your business, don’t worry if it seems too high or too low compared to the examples on these lists. You will want to calculate this cost regularly, either every month or every quarter. Tracking your CAC over time will help you figure out if you’re spending more or less to bring in customers, and give you a sense of how effective your marketing is over each time period. You might find that your customer acquisition cost changes when you try new tactics to bring in customers, or you might take your CAC as a sign that you need to change your marketing strategy. 

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