The Customer Acquisition Cost (CAC) is the total cost of acquiring a new customer. While it’s commonly used interchangeably with the Cost Per Acquisition (CPA) metric they are not actually the same – CAC is measuring the cost of acquiring a customer, while the CPA is measuring the cost of an acquisition, which could simply be a lead or a free trial signup.
It’s important to note that there is more than one way that people commonly calculate CAC. We calculate Blended CAC by dividing the total costs involved to acquire the customer (such as marketing expenses, employee salaries etc) by the number of new customers acquired in a given period. This provides us with a CAC metric that includes customers what we’ve acquired through organic channels.
We calculate Paid CAC by dividing the total costs to acquire our customers by the number of customers acquired through paid channels. This is arguably the more useful metric as it allows us to see whether our paid channels are profitable, and if so, whether we can start scaling up our use of these paid channels for an effective paid acquisition growth loop.
Additionally, we can go further and break down these costs by our individual marketing channels to measure the performance on a channel by channel basis.
To find your CAC you need to calculate the total cost of your sales and marketing expenses relating to new customer acquisition. Some examples of common costs relating to sales and marketing:
Once you have these numbers ready, you can calculate your acquisition costs.
Blended CAC: Total cost of your sales and marketing ÷ New Customers Acquired
Paid CAC: Total cost of your sales and marketing ÷ New Customers Acquired Through Paid Channels
Tip: a CAC metric where the calculation includes salaries is often known as a “Fully Loaded CAC”
Breaking CAC down on a per-channel basis is a good way to help you optimize your marketing budget, and make sure you’re not leaving potential growth and profit on the table.
To accurately measure CAC by marketing channel you need to be able to attribute your new customers to the particular channel that brought them in, which is often done using analytics tools like Google Analytics or Amplitude. You can then break out a spreadsheet and calculate the total cost of each of your marketing channels (for example, the totals costs involved in your Adwords campaigns) and then divide each of these by the number of new customers that were attributed to that channel.
Attribution is a complex subject that we will be writing about in more detail in the future, so make sure to subscribe to our newsletter below for updates.
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