Customer acquisition cost is what a brand spends to convert curious browsers into paying customers. The business weighs its customer acquisition cost against how much customers spend to determine whether its marketing efforts are profitable.
Businesses analyze customer acquisition costs to find the most cost-effective ways to acquire customers. According to a McKinsey study, customer acquisition costs rose an average of 60% between 2017 and 2022. For brands operating on narrow margins, every percentage point of efficiency translates directly into profit.
Here’s how to calculate customer acquisition cost, compare it to customer sales generation, and find ways to lower acquisition costs while increasing revenue.
What is customer acquisition cost?
Customer acquisition cost (CAC) is the amount you spend in a given period to acquire customers. It’s an average, determined by adding up all the costs of your sales and marketing efforts in a period of time, divided by the number of customers added in that period.
Customer acquisition cost is most useful when compared to how much those customers spend during their entire relationship with your brand. This is often expressed as a ratio of customer lifetime value to customer acquisition cost, or LTV/CAC.
For example, Mike Salguero, founder and CEO of subscription service ButcherBox, describes LTV/CAC as the most important metric for a subscription-based business. “Your lifetime value, what is that? That is defined as the margin that you make off of a customer over their lifetime,” he says on an episode of Shopify Masters. “So if you're a subscription dog food company and you make $25 a month, and the average customer lasts for 10 months, you've made $250 in lifetime value on that customer. Then, what you want to look at is how much did it cost to acquire that customer? And then look at the return profile of your customer acquisition cost to lifetime value ratio.”
Customer acquisition cost is sometimes used interchangeably with cost per acquisition (CPA), but they’re different. CPA only tracks the cost of generating a lead or building an early relationship with a prospective customer. Cost per acquisition, sometimes referred to as cost per action, includes things such as getting potential customers to create an online account, opt into marketing emails, or sign up for a free trial. The cost of engaging a curious prospect is typically much less than the cost of converting them into a paying customer.
What is a good customer acquisition cost?
The ratio of average customer lifetime value to acquisition cost varies widely by business model, but many businesses use a benchmark of 3:1, meaning a business aims to generate at least $3 in sales, on average, from a new customer for each $1 spent acquiring them.
Let’s say a subscription-based seller of household cleaning supplies spends $50 on average to attract new customers. To hit a 3:1 LTV/CAC ratio in the first year, the brand needs each new customer to spend $150 in purchases during those 12 months. If customers stay longer, the LTV/CAC ratio and profitability both improve.
How to calculate customer acquisition cost
Calculating customer acquisition cost involves a few steps:
1. Set a time frame
Smaller businesses may track costs on a weekly or monthly basis to get a more immediate read on new customer purchases versus costs of attracting new customers. Businesses seeking bigger customers with longer lead times might track CAC quarterly or annually.
2. Add up marketing costs
Determine how much you spent on the campaign to land new customers. Only track costs tied to acquiring those customers, not expenses for servicing or retaining existing ones via loyalty rewards or re-engagement emails to past buyers. Mixing the two inflates your CAC and makes it hard to tell whether your acquisition efforts are actually working.
3. Divide total costs by the number of new customers
The basic formula for customer acquisition cost is:
Costs of attracting new customers / Number of new customers
For example, a business spends $250,000 to attract new subscribers for its quarterly boutique coffee and tea box. By the end of the quarter, it has 250 subscribers. Its CAC is $250,000 divided by 250, or $1,000 per customer.
Counting new customers is straightforward, but identifying all the relevant costs often requires pulling expense data from multiple departments. These costs can include:
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Advertising and marketing expenses. Traditional and social media channels, plus free trials and introductory offers.
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Salaries and commissions. For sales and marketing efforts to acquire customers.
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Content. Material created by outside agencies, such as digital campaigns, creative and production costs, affiliate marketing, and search engine optimization (SEO) to boost online presence.
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Tools and analytics. Software and data systems used to track and analyze spending and conversion rates.
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Events. Trade shows, conferences, and travel expenses.
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Professional services. Fees and retainers for lawyers, accountants, consultants.
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Overhead. A portion of general business overhead allocated to customer acquisition efforts.
CAC calculator
Here is a basic example of a spreadsheet to calculate customer acquisition cost and your customer lifetime value.
How to monitor and improve your customer acquisition cost
There are several ways your business can improve its customer acquisition cost:
Refine customer targeting
Target your prospective customers more precisely based on their demographics, purchasing patterns, account history, or engagement with your marketing content. This can reduce wasteful marketing and ad spend. Shopify Audiences can help your business reduce customer acquisition costs through focused audience targeting on paid channels.
Focus on the most effective marketing channels, and use your customer relationship management (CRM) software’s automation tools to reduce manual tracking. Shop Campaigns is another Shopify feature that lets you set a target customer acquisition cost and daily budget, helping you measure and control your CAC.
Optimize your site for conversions
For conversions, Shopify's Campaign Attribution Report tracks CAC and the number of first-time customers attributable to a campaign, letting you see your CAC without a separate calculator.
Boost your LTV/CAC ratio
This is more about increasing your customer lifetime value than decreasing your customer acquisition cost. Increasing the ratio shortens your payback time—how long it takes to recoup your customer acquisition cost. Ways to increase LTV include upselling, persuading customers to buy additional products or services, or a premium subscription over a standard subscription. Another way is to build customer loyalty through incentives such as rewards for repeat customers, and exclusive deals or discounts for existing customers.
Mike of ButcherBox ensures that his CAC is paid back by extending the lifetime of each customer. “If I acquire a customer at month zero, and within two months they repaid me, then everything beyond that is gravy,” he says. “Where I see a lot of people fail in subscription businesses is they spend a lot of time on how to drive down acquisition costs, but not a lot of time on how to increase lifetime value. Increasing lifetime value is by far the easier one to do.”
The goal, Mike says, is to reduce churn rate. Even extending the customer life cycle for a month or two by offering a freebie is worth it because retaining existing customers costs less than finding new ones. Mike also recommends negotiating for lower costs to raise LTV. “Did you negotiate the shipping rates? Did you negotiate your credit card fees? Did you negotiate the cardboard box? Did you negotiate the liner in the cardboard box? Negotiate everything. Lots of great fruit to be found in the realm of: How do we get a better product to our customer cheaper?” he says.
How to calculate CAC FAQ
What are common CAC mistakes?
Common CAC mistakes include mixing the costs of retaining existing customers with the costs of acquiring new ones, and only factoring in sales and marketing costs, ignoring other relevant costs such as software used for screening prospects and outside marketing or professional services.
What is a good CAC value?
Businesses generally strive to achieve a customer lifetime value that’s at least three times more than customer acquisition cost. This 3:1 ratio is a common yardstick for gauging profitability.
How do you reduce CAC?
Lower customer acquisition cost by eliminating underperforming ad campaigns and shifting to cheaper and more effective social media channels. You can also focus on retention—offering promotions, perks, loyalty programs, and personalized service—or improve SEO so organic traffic does some of the work your paid ads do.
