Finance:Customer acquisition cost

Short description: Cost of winning a customer to purchase a product or service

Customer acquisition cost (CAC) is the cost of winning a customer to purchase a product or service. As an important unit economic, customer acquisition costs are often related to customer lifetime value (CLV or LTV).

With CAC, any company can gauge how much they’re spending on acquiring each customer. It shows the money spent on marketing, salaries, and other things to acquire a customer. Keep an eye on CAC so it doesn’t get out of control. For example, no rational company would spend $500 to acquire a new customer with an expected LTV of $300 because it would drain $200 of value per customer acquired.

CAC, combined with LTV is a frequently compared metric, particularly for SaaS companies. They can manage their expenses, see their growth, predict their future moves, and expand if the business allows.

Calculating customer acquisition costs

There is a simple and complex method for calculating acquisition costs.

Simple method

The simple method divides the total marketing costs to acquire new customers by the total number of customers acquired in a defined period. [math]\displaystyle{ CAC=\frac{MCC}{CA} }[/math]

• CAC = Customer Acquisition Cost
• MCC = total marketing cost for acquiring customers (not regular customers)
• CA = total customers acquired

Complex method

In addition to the costs incurred in marketing, the complex method includes sales and marketing wages, software costs for sales and marketing, all additional professional services such as designers, consultants, etc., as well as other overhead costs. [math]\displaystyle{ CAC=\frac{MCC + W + S + PS + O}{CA} }[/math]

• CAC = Customer Acquisition Cost
• MCC = total marketing cost for acquiring customers (not regular customers)
• W = wages connected with sales and marketing
• S = all the marketing and sales associated software cost (inc. E-Commerce-Platform, automated marketing, A / B-testing, analytics etc.)
• PS = every additional professional service in marketing / sales (Designer, consultant, etc.)
• O = other overheads associated with marketing and sales
• CA = total customers acquired

Customer acquisition costs in relation to customer lifetime value

Customer lifetime value expresses the monetary value that a customer is worth to the company in the course of a customer relationship. If the ratio of LTV to CAC is now calculated, different values can result.

• 1:1 – The company loses money (if we take the cost of providing the service into account)
• Less than 1:1 – The company gets into financial difficulties because more is paid for customers than they are worth.
• 3:1 – A very good level because the customer relationships are solid and customers are acquired for the right price.
• Higher than 3:1 – The company has untapped growth potential to acquire customers.

Customer acquisition costs in the environment of start-ups and venture capital

In the approach and review phase of venture capital companies to start-ups, the CAC and LTV ratios can be of great importance depending on what type of market or product is produced.

See also

• Customer acquisition management
• Customer lifecycle management
• Performance metric
• Controlling
• Marketing
• Sales
• Venture capital
• Software as a service (SaaS)

References

• Chen, Pei-Yu (Sharon); Hitt, Lorin M. (200), Switching Cost and Brand Loyalty in Electronic Markets: Evidence from On-line Retail Brokers, Proceedings of International Conference on Information Systems, https://www.researchgate.net/publication/221599686 
• Natalie, Luneva (2020-07-28). "Must Track SaaS Metrics to Grow Your Software Startup in 2020". https://www.natalieluneva.com/must-track-saas-metrics-to-grow-your-software-startup-in-2020/. 
• Domingos, Pedro; Richardson, Matt (2001), Mining the Network Value of Customers, Proceedings of the Seventh International Conference on Knowledge Discovery and Data Mining, ACM Press, pp. 57–66, http://www.cs.washington.edu/homes/pedrod/papers/kdd01a.pdf 

• Botteri, Philippe (2008-03-02). "Measuring sales and marketing effectiveness of SaaS companies: The CAC Ratio". http://www.cracking-the-code.blogspot.co.uk/2008/03/measuring-sales-and-marketing.html. 
• Botteri, Philippe (2008-11-02). "One Number to Manage Your SaaS Sales &Marketing Spend: The CAC ratio". Bessemer Venture Partners. http://www.bvp.com/sites/default/files/cac_ratio_-_one_number_to_manag__your_saas_sm_spend_-_october_2008.pdf. 
• Skok, David (2010-02-17). "SaaS Metrics – A Guide to Measuring and Improving What Matters". http://www.forentrepreneurs.com/saas-metrics/. 
• Hsu, William (2012-08-23). "New Rules For E-Commerce". Forbes.com. https://www.forbes.com/sites/ciocentral/2012/08/23/new-rules-for-e-commerce/. 
• Haden, Jeff (2011-12-27). "4 Business Metrics You Can't Afford to Ignore". Inc.com. http://www.inc.com/jeff-haden/4-business-metrics-you-cant-afford-to-ignore.html. 
• Gruher, Scott (2011-09-24). "Go to Market Strategy: How Much Are Your Customers Worth?". http://www.salesbenchmarkindex.com/bid/67565/Go-to-Market-Strategy-How-Much-Are-Your-Customers-Worth. 
• Rotem, Eran (2021-08-31). "customer acquisition cost (cac) - a management concept worth knowing". All about the terms CAC, CLV, ROI, TCO, MAC, SAC. Adcore.
• Rouse, Margaret (March 2010). "Customer acquisition cost". TechTarget. http://searchcrm.techtarget.com/definition/customer-acquisition-cost. 

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