The customer acquisition cost is a measure that reflects how much it costs to acquire a new customer.
There are three ways to analyze the customer acquisition cost (CAC).
- Compare the costs of acquisition across channels – take a look at the different channels you use to promote and sell. For instance, you might use Google search ads, social media, or direct sales. Each channel has a different cost, so the comparison shows which channel is most cost effective, and hence, gives you the biggest bang for the buck.
- Compare the cost of acquisition with customer lifetime value (LTV) – LTV is the lifetime revenue you get from a customer less the cost of acquisition. When you divide the LTV by CAC, you want to see a high multiple. Anything less than one indicates that the customer is not profitable.
- Evaluate the payback period for CAC – this is particularly useful for companies that have a recurring revenue stream. For example, Microsoft 365. You pay a monthly fee for that service. To calculate the payback period, divide the CAC for a customer by the monthly gross margin for the customer. This gives the number of months it takes to recover the CAC. You would want to keep the payback period to under 1 year.
The customer acquisition cost, in conjunction with the customer lifetime value and its payback period, are useful measures to evaluate your marketing and sales effort.