How to Calculate Your Customer Acquisition Cost (CAC)

May 9, 2017
customer acquisition cost feature

We often hear the saying “it takes money to make money”, and nowhere is that more true than in customer acquisition. Customer acquisition is and always has always been a game of give and take. Brands have to give shoppers a reason to complete a purchase before they will take the steps to become a customer.

The thing is, not every business plays the customer acquisition game in the same way. Savvy brands have learned how to reduce their customer acquisition cost and are setting themselves up for long term success. Luckily for you, we’ve got everything you need to step up your acquisition game right here.

Reduce-CAC-Steps-1-and-2

How to calculate Customer Acquisition Cost (CAC)

Calculating your brand’s customer acquisition cost allows you to assess their acquisition spending at the most granular level on a per customer basis. This is done by dividing the total amount spent on customer acquisition by the total number of customers acquired, as shown in the equation below.

customer acquisition cost calculation simple

This is customer acquisition cost in its simplest form. A brand that uses the above formula will be able to easily calculate their lifetime CAC, which is a historic measure of the average cost to acquire a customer since the creation of the brand.

Calculating CAC per period

Lifetime customer acquisition cost is a great tool for general trend analysis but sometimes you’ll want to get a little more current. In these instances, it’s best to calculate CAC on a per period basis using the formula below.

customer acquisition cost cost per period calculation

This per period CAC formula relies on knowing the number of customers acquired during a particular period. If that number isn’t readily available, you can always use the supplementary equation below to quickly calculate it.

customer acquisition cost gained calculation

Using the per period formula, you can now calculate customer acquisition costs based on whatever time intervals are most relevant to your business.  This could be weeks, months, quarters, or even years!

The per period CAC formula helps a brand collect acquisition information in a way that can be easily summarized and included in time-based reports. It also assists in assessing a business’s acquisition strategy period to period.

A question that often arises after calculating CAC with these formulas is what can be done to decrease it? The answer largely depends on what acquisition initiatives your company engages in.

The illusion of growth will continuously increase acquisition costs

If your customer acquisition strategy revolves around paid advertisements or promotions, you’ve probably already experienced having to increase your ad spend, or offer steeper promotions to attract sales.

The problem is there’s no economy of scale with this methodology, so these costs are going to always get higher. With the price of advertising increasing at 5 times the rate of inflation, there’s no end in sight for the rising acquisition costs from paid ads.Illusion-of-Growth-ModelThis means that while your overall number of sales might be increasing, your cost to acquire each successive sales is increasing too. The ads and promotions effectively motivate immediate action, but at a cost that does very little for your baseline sales that create long term, sustainable growth.  

Instead of spending more and more just to make a sale, you need to build a brand community shifting your focus to creating long-term customers that love your brand and keep coming back.

You need a brand community
Find out how to start building yours in three simple steps

Acquire customers once and for all

Once you’ve made a sale, it’s easy to feel like like it’s mission: accomplished. Unfortunately, customer churn is an all too common reality for many ecommerce brands, causing many of them to dedicate more of their acquisition budget to getting those same customers back.

the fastest way to cut your customer acquisition spend in half is to stop paying to acquire the same customer twice.

Getting customers to give your brand a chance can be hard, but getting them to give you a second chance is even harder.  This makes repeat acquisitions extremely wasteful and costly.

So how can you lower your re-acquisition costs? Simple: by eliminating them. You don’t have to re-acquire a customer that you don’t lose. By investing in retention marketing, you can cure customer churn instead of simply treating the symptoms. 

If you’re looking for a powerful retention tool, there’s no better place to start than a rewards program.  These programs are specifically designed to build brand communities and develop customer relationships that keep shoppers coming back to your store. Whether it’s with points, referrals, or a VIP program, brands that choose to give something back to their customers are always the better for it. Trust me-  your acquisition budget will thank you.

Turn your community into an acquisition army with advocates

It’s no secret that the most successful marketers are the ones that truly understand their customers. These strategists understand customer pain points and deliver the products and services that solve them. No one could possibly understand these shoppers more -  except for maybe the shoppers themselves.

Your customers don't just understand your value proposition - they've lived it.

It’s true: the best marketers of your product might actually be the users themselves. They understand your target market because they are your target market, and they’re usually well connected to other potential customers.

The best part is that by allowing your community members to make referrals, you can dramatically lower your customer acquisition costs by making the most of word of mouth marketing- a form of marketing which more than 92% of customers trust.

92% of customers trust word-of-mouth marketing.

If you’re delivering a great customer experience, chances are that your customers already want to spread the word about your brand. All they need is a little nudge to join your brand advocate army, and a rewards program can give them exactly that.

Rewards programs are built to incentivize and reward customers for valuable actions like repeat purchases, and online engagement, but they don’t stop there. When Uber needed a quick way to acquire riders that wouldn’t break the bank, they turned to their customers and created a referral program that propelled them to unprecedented growth.

Social sharing and referrals are only the beginning. Customers can also be rewarded for product reviews and much more.

A referral program like Uber’s isn’t the only option, though.  You can also provide your customers with rewards for social sharing so that they can share your brand’s value with everyone in their circles. These low cost, community driven marketing campaigns simultaneously reduce your acquisition costs while also increasing your community engagement. Talk about a win-win.

Customer acquisition doesn't have to be a loss

Customer acquisition is an important part of any business model and should be treated as such. The problem arises when brands let their customer acquisition costs go unmanaged and end up spending much more than they need to with unsustainable ad spend. While it definitely takes money to make money, don’t let that be your excuse for wasting money.

After effectively focusing your acquisition efforts, you’ll know that every dollar spent on acquisition helps introduce new customers to your brand. By investing in a brand community, you’ll make sure you don’t have to acquire them again.

Want to take control of your retention metrics?
Learn to track and improve your most important metrics for the best results