As the old saying goes, you have to spend money to make money—and that adage might be best summed up by the concept of customer acquisition cost, or CAC. Your CAC is the amount of money you spend to generate a new loyal customer.
Knowing how much you spend to attract and retain customers can help you understand what kind of return on investment (ROI) you’re getting. Then you can make more intentional decisions about how you market moving forward.
Keep reading for everything you need to know about CAC, including how to calculate customer acquisition cost, the average customer acquisition cost by industry, and how to reduce your CAC.
A go-to customer acquisition cost definition for you: CAC is the average cost to acquire a customer.
Keeping this cost as low as possible helps you reduce spending and drive profit. That can be challenging, because it generally costs five times more to attract a new customer than hold onto a current customer, per PennState.
One of the big benefits of customer lifecycle marketing is you’ll spend less to retain customers who are already familiar with your brand. A thoughtful, intentional, multi-channel approach to customer acquisition can help you bring in new customers while minimizing costs as much as possible.
What formula is used for CAC? The most straightforward customer acquisition cost formula is pretty simple:
Customer Acquisition Cost = Marketing Cost / Number of Customers
If you spent $500,000 on marketing and generated 12,000 new customers, for example, your CAC would be:
$500,000 / 12,000 = $41.67
That means your CAC is $41.67 to acquire each customer.
Some business owners prefer to use a more detailed, thorough formula. This CAC calculator requires you to gather a few more data points about your own spending. But the payoff is it can give you a more precise number for your CAC.
CAC = (MCC + W + S + PS + O) / CA
Let’s break that down:
As you can see in the more thorough customer acquisition cost formula above, there are many different categories of spending you should include in your marketing costs.
Marketing campaign costs can include:
At the most basic level, CAC helps you reduce unproductive spending and focus your costs on strategies and channels that work. A healthy CAC score reflects profitability. A less healthy CAC score can help you target and address inefficiencies in your processes, strategies, channels, and creative.
But there are some more nuanced benefits, too: Knowing your CAC can help guide your business decisions based on metrics rather than feelings. You undoubtedly like some of your customers as human beings and would appreciate cultivating a rewarding relationship with them regardless of their intentions to do business with you in the future. But there are only so many hours in the day. Knowing your CAC (and your lifetime value—more on that below) can help you make sure you’re spending your precious hours on the right customers in the right ways.
New businesses can get even more helpful information by comparing CAC to lifetime value or LTV, according to HBS.
LTV is the value a customer delivers to your business over time, measured in the profit contributions from all of their transactions. To calculate LTV, you need to know two important numbers, per HBS:
That gives you the following LTV formula:
Lifetime Value (LTV) = m x T
The result will be a dollar amount for “the value the customer delivers to your company over the time they remain in business with you,” per HBS.
For example, if your yearly customer contribution margin is $75 and your customers tend to stay with you for 4 years, your LTV would be:
$75 x 4 = $300
Finally, you’re ready to determine your LTV/CAC ratio.
Simply divide your LTV by your CAC. Sticking with our examples above, that looks like:
$300 / $41.67 = 7.12
That means the customer delivers 7 times more value than it takes to acquire them. Win!
So why is LTV/CAC important? It helps provide a clearer picture of your performance, especially in the early stages of a start-up. What’s a good LTV/CAC? Generally, at least 3, according to HBS.
If it’s less than 1, you’re spending more on customers than they’re spending on you. Between 1 and 2, you’re breaking even or making a small profit, which might not be very satisfying to your investors. Reducing CAC (keep reading for tips on how to do just that) and improving customer satisfaction can help you tweak this measure of your success, per HBS.
In other words, what makes a “good” customer acquisition cost is that it’s significantly lower than your customer’s lifetime value. That results in a robust LTV/CAC ratio of 3 or more.
Once you know your business’s CAC and LTV/CAC, you’ll probably be curious next about how you measure up with your competitors. It can be helpful to have a rough sense of CAC by industry to use as benchmarks for your own profitability.
According to Shopify, here are the average CACs for several different industries:
If you’re not happy with how your numbers are looking, it’s time to improve your CAC to boost profitability. There are lots of different tactics to employ here, including:
In the traditional customer acquisition journey, your activities help advance the decision-making process. But when you get distracted trying to hit marketing metrics and revenue goals, you might accidentally start making your way down the company journey, when you make business decisions that aren’t aligned with how people shop. It’s crucially important that you stay away from the company journey. Show a non-relevant offer, and your customers will ignore it. Ask for a sale too early, and they’ll close the tab. Send emails or push notifications too often, you’ll be marked as spam. And all that adds up to raising your total CAC.
Maybe it’s time for a reset: Learn more about journey mapping and carry out the activity for yourself. Then, think carefully about how much time your customers truly need to move through these stages—because the longer it takes, the higher your CAC.
Just like how you wouldn’t ask the first person you make eye contact with while crossing the road for their number, you shouldn’t be trying to collect contact information when they land on your page for the first time. But if you can’t cut this period down any further, it may be time for some customer journey retargeting. You might be deploying the wrong tactic at the wrong stage of the customer journey. Or you might be wasting precious marketing dollars because a given strategy isn’t moving customers forward.
A great way to cut down on customer acquisition costs is to monitor your advertising efforts closely, which you can accomplish using Triple Whale’s Acquire Add-On. With AI agent-powered recommendations, it is easy to monitor all of your campaigns across ad channels and determine which campaigns to scale spend, or which to turn off because they’re not delivering the best new customer ROAS.
Marketing is about helping customers along this journey faster. Timing is everything. There’s no way you can artificially engineer timing. But you can anticipate it with the right data, and show the right message at the right time. In other words, you should have a plan that addresses every stage of the acquisition customer journey.
Too often, business owners look at just one type of data: quantitative data, aka the numbers in ad managers, ecommerce analytics dashboards, or email reports.
Qualitative data, on the other hand, come from heat maps, user surveys, reviews, customer support tickets, quizzes, and other zero-party data collection tools.
Combining qualitative and quantitative data can give you better clarity on activities you should be doing, messaging you should be using, creatives you should be sourcing, and customer segments you should be creating at each stage of the journey, which in turn enables customers to buy better and lowers your CAC.
When operating a brand with an omnichannel approach, it can often be difficult to understand which channels are driving the most revenue. Using Triple Whale, Tubby Todd was able to get a clearer picture of their marketing efforts as a whole, and able to pinpoint which channels drive customer acquisition most efficiently. As a result, Tubby Todd was able to lower their customer acquisition cost on TikTok by 65%.
"Triple Whale really helped us validate our revenue drivers and understand new customer acquisition costs. It was all about finding out if we were on the right track and focusing our budget effectively. And with zero party surveys from Kno and Total Impact from Triple Whale, we can more confidently see how platforms like TikTok and YouTube were fitting into our media mix, really driving results for our brands."
-Justin Buckley, Co Founder, ATTN Agency
Assess the opportunities you’re giving your customers to make a purchase, add a product to cart, or take another desired action. If the customer lifecycle journey of your brand leaves any opportunity for confusion, it’s time to make things clearer.
That can involve adding more (or more obvious) CTAs to your website; running A/B tests to finetune your conversion messaging; and adding pop-ups or sliders to various pages to encourage conversions, according to Coursera.
Triple Whale’s Conversion Add-On enables you to turn visitors into customers with sophisticated web analytics at your fingertips, along with AI agents that detect anomalies or find opportunities to improve conversion rates across your entire website. Product Analysis, Product Journey, Cart Analysis, and Web Analysis features bring all of the marketing, website analytics, and customer data in one place, to accurately pinpoint exactly what is driving conversions (or blocking them).
Try Triple Whale’s Conversion Add-On to turn visitors into customers.
You may be missing out on some conversions because your product or service isn’t hitting the nail on the head for what your potential customers are looking for. Find out why. Through surveys, focus groups, website analytics, and online forums, gather as much feedback as possible about the experience people have with your business. Then, use that information to tweak your marketing strategy and watch your customer lifetime value improve.
A Post-Purchase Survey (PPS) can also uncover where your ads are most effective, since the first exposure a customer has with your brand is not always the channel that gets credit for the conversion in the end. For example, a customer might discover your product on TikTok, but then choose to purchase it on Amazon. When you ask your customers in a PPS where they remember first seeing your product, TikTok might be revealed as a prime customer acquisition channel. This information can determine where you choose to invest more advertising energy in the future, to improve customer acquisition.
Make sure you have an easy way to track and analyze how your advertising is performing. When you can quickly visualize metrics like click-through rate, conversion rate, and cost per acquisition, you’ll be able to remove, replace, or reiterate creative that’s underperforming so your ad spend dollars are put to more effective use, per the AMA.
Investing in search engine optimization (SEO) is a low-cost yet highly effective way to improve your CAC. SEO takes some time to implement correctly, but once your business’s website is optimized, your products and services will be easier for your future customers to find, according to the AMA. Part of this process might include launching a content marketing strategy or referral program to introduce your
Your customers will keep coming back if they’re satisfied, according to the AMA. Customer service that goes above and beyond improves customer retention and in turn boosts your LTV and improves profitability.
You don’t have any acquisition cost if you attract a new customer because their friend or family member simply referred them to you. So creating opportunities for loyal customers to be rewarded for promoting your brand—which they already love—can pay off for both of you. That might look like a referral program, a loyalty program, or some other incentive for your loyal customers to share your brand with their networks.
Tools like those available from Triple Whale can help you automate and streamline your marketing process, which cuts down on cost while making acquisition more efficient. We can help you manage reporting, historical analytics, email and SMS campaigns, and more.
Triple Whale’s Moby Agents are the only agents built for intelligence on your entire brand, so you can save hours of time on manual tasks that can now take mere minutes. These AI agents can reveal which conversion paths need testing across your entire site, spot which copy and creative are driving performance across each channel, and analyze data across your entire stack to minimize wasted spend.
Try Moby Agents to save time and make more confident, data-driven decisions.
Customer acquisition cost is the average amount of money it costs to acquire one customer. A good CAC is low, because that means you’re spending less money than your customer is spending on you. CAC varies across industries, but there are some tried-and-true techniques to reduce CAC that any brand can employ, such as improving conversion rates, collecting feedback, leveraging organic marketing, and implementing referral programs.
Calculate your CAC and your LTV/CAC today, then leverage Triple Whale’s combination of trusted measurement tools, full-funnel analytics, and ecommerce agents to make faster, more confident decisions.
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