Diving into Customer Acquisition Cost. Industry Benchmarks & How to Reduce Tips

Customer Acquisition Cost (CAC) is a critical term in the business world. At its core, Customer Acquisition Cost is an amount of money a company spends to acquire a new customer. 

So, it is how much money a company spends to get one new customer. If the CAC is $10, it means that it costs the business $10 to get one customer to make a purchase.

At first glance, this is a very simple concept, but at the same time it is not. A clear calculation of CAC lets a business to strategize and invest in the right areas. This maximizes growth and profits.

Why CAC is so Important?

In marketing language CAC gives businesses a clear picture of their return on investment (ROI) for marketing and sales efforts. Companies like Facebook, Netflix, and Instagram invest heavily in customer acquisition. They know that every dollar spent is returned many times over, thanks to a well-calculated CAC strategy.

CAC lets businesses measure the cost-effectiveness of marketing strategies. It helps them make better investment decisions.

The ability to pay more for customer acquisition than your competitors is a key factor in winning market share:

"those who can pay the most for their customers always win."

Each marketing channel (like Facebook, YouTube, or Google Ads) can have different acquisition costs. For example:

• Facebook Ads: may cost $15 to acquire a customer.

• YouTube Marketing: acquiring the same customer could cost only $10.

By comparing CAC across channels, businesses can better allocate their marketing budget. They can then focus on strategies that yield higher returns. 

Is $7.50 per customer good? The answer depends on other channels and strategies. Comparing CAC across platforms helps businesses test and improve their marketing.

Once you have the CAC for different channels, you can evaluate their effectiveness.

How to Calculate Customer Acquisition Cost

One of the simplest ways to calculate CAC is to:

• Step 1: Take the total cost of a marketing campaign.

• Step 2: Divide that by the total number of customers acquired through the campaign.

If a Facebook ad campaign costs $150 and results in 20 customer acquisitions, the CAC calculation would be:

CAC = $150 / 20 customers = $7.5 per customer

This means that for every $7.50 spent on Facebook ads, the business acquires one customer.

But in reality, things are not as simple as they seem.

There are two primary costs involved in calculating CAC:

1. Marketing costs -  the total cost of any marketing efforts such as ads, billboards.

2. Sales costs. You need to calculate the commissions and salaries for your reps who close deals. In service-based businesses, the sales team is a major cost. 

Formula: CAC = (Total Marketing + Sales Costs) / Number of New Customers Acquired

Ensure you calculate CAC based on your entire marketing and sales spend, not just ads. For accurate results, track this over a meaningful period (e.g., a quarter or a year).

And don't confuse CPA with CAC. CPA (Cost Per Acquisition) only measures direct ad costs. CAC includes all marketing and sales expenses.

Fully Loaded CAC

Investors will often ask about your fully loaded CAC, which goes beyond marketing and sales expenses. 

It includes:

• Salaries for your marketing and sales teams.

• Office rent (for the portion dedicated to marketing and sales activities).

• Software and tools used for customer acquisition (e.g., CRM tools, attribution platforms).

• Bonuses for customer success teams. They should drive retention and growth.

Fully loaded CAC captures the true cost of acquiring customers. It includes indirect costs, like overhead and team salaries.

Example Calculation

Let’s break down an example of employing a virtual assistant (VA) to handle outbound prospecting. Let's assume that the monthly salary of a virtual assistant is $400. This is a typical cost for a VA based in the Philippines, where labor costs are lower than in many other regions.

In a typical month, the VA is expected to make around 4,000 contacts. These contacts could be through email, LinkedIn messages, or cold calls—any form of direct outreach to potential customers.

Cost per Contact = 400 / 4,000 = $0.10

Out of these 4,000 contacts, a small percentage will turn into actual leads—people who express interest in learning more or taking the next step. The lead conversion rate is estimated at 1-3%. For simplicity, let's assume a 3% conversion rate:

Leads = 4,000 x 0.03 = 120 leads

So, the VA’s efforts result in 120 qualified leads for further sales efforts.

To find out the cost for each lead, we take the total salary of the VA and divide it by the number of leads generated:

Cost per Lead = 400 / 120 = $3.33

Of the 120 leads, not all will proceed to the demo or sales call stage. The demo booking rate is estimated to be around 20%. So, let’s calculate how many leads book a demo:

Demos Booked = 120 x 0.20 = 24 demos

Therefore, out of 120 leads, 24 people will schedule a demo or sales call.

To find out the cost for each demo, we take the VA's salary and divide it by the number of demos booked:

Cost per Demo = 400 / 24 = $16.67

Therefore, it costs $16.67 to book each demo or sales presentation.

Now, let’s factor in the sales team. The sales representative has a closing rate of 20%, meaning 20% of the demos result in actual sales. Therefore, the number of sales or customers from the 24 demos would be:

Customers = 24 x 0.20 = 4.8 customers

Rounded up, this means 5 new customers.

To find the cost to acquire one customer (excluding commissions), divide the VA's salary by the number of customers generated.

Cost per Acquisition (CPA) = 400 / 5 = $80

The $80 is what it costs, using just the VA’s salary, to acquire each customer. However, this calculation does not yet include the sales commission.

In many service-based businesses, sales reps are paid commissions on closed deals. In this case, the commission rate is 10% of the gross sale price. Assuming the product being sold is priced at $3,000, the sales rep earns:

Commission = 3,000 x 0.10 = $300

The sales rep is paid $300 for each sale closed.

To find the total cost of acquiring a customer (including commissions), we add the cost per acquisition (CPA) and the sales commission:

Final CAC = 80 + 300 = $380

The Final CAC for this business example, including both the VA’s salary and the sales rep’s commission, is $380.

Summary of Costs:

• VA Salary: $400

• Cost per Contact: $0.10

• Cost per Lead: $3.33

• Cost per Demo: $16.67

• Cost per Acquisition (without commission): $80

• Sales Rep Commission (10%): $300

• Final CAC: $380

Tracking CAC

Tracking CAC is essential for knowing which marketing channels bring the most value. Businesses can track CAC in several ways:

1. Ask Customers: Asking new customers how they heard about the business can provide valuable insight.

2. Use Software: Tools like Google Analytics help track traffic sources, conversion rates, and which channels lead to successful sales.

3. Daily Tracking Sheets: Companies can use dashboards or spreadsheets to track marketing spend and lead acquisition in real-time.

To calculate CAC accurately, track the conversion rate. This is the percentage of people who take meaningful actions, like signing up for a mailing list, donating, or making a purchase. This ensures that the number of customers acquired through a specific channel is isolated and measured correctly.

Once CAC is understood and tracked, businesses should focus on optimizing it. For example, by refining ad targeting or improving sales funnels, companies can lower their CAC. This will increase the value of each dollar spent.

Why CAC Matters

CAC is critical for several reasons:

Sustainability

If your CAC is higher than your Customer Lifetime Value (CLV), your business may not be sustainable in the long run.

Investment Readiness

Investors expect startups to know their unit economics, especially CAC. It directly affects profitability.

Growth Strategy

By knowing your CAC, you can adjust your marketing and sales strategies to improve efficiency and reduce costs.

How articles in media can impact CAC

Media coverage can help your brand get noticed. It makes it cheaper to attract new customers. When people see your brand in trusted media, they are more likely to check out your product or service. This happens without needing many paid ads. This can naturally bring in leads and lower your overall customer acquisition costs (CAC).

Being in reputable media builds credibility. It positions your company as an industry leader. This trust reduces "friction" in the acquisition process. Customers prefer brands they see as trustworthy. 

Media often create a positive view. This can boost conversion rates from marketing channels. As people see your brand in trusted media, they are more likely to convert when they later encounter your ads. Higher conversion rates mean a lower CAC. You can turn prospects into customers more efficiently.

As your brand gains respect, it can raise each customer's lifetime value (LTV). With a higher LTV, businesses can afford to spend more on acquisition while maintaining healthy unit economics.

Although media coverage is not a direct sales tool, you can’t go wrong if you follow the advice of entrepreneur David Skok. Skok has revealed a pattern of startup survival based on the ratio of customer acquisition to customer lifetime value (CAC/LTV). Skok studied the metrics of young companies and found that those companies that acquire customers for a third or less of their lifetime value were more likely to survive. Companies that attracted customers for a cost equal to their lifetime value lacked the funds to grow and disappeared from the market.

The CAC/LTV ratio doesn’t have to be 1–3; it can be 1–10. But you should pay attention to this ratio like a traffic light anytime the ratio is reduced.

Also, media coverage can attract investors and partners. It can help you acquire customers or scale through collaborations. This can lower CAC, directly or indirectly. It creates new growth opportunities without a heavy reliance on paid channels.

How to reduce Customer Acquisition Cost

Reducing organizational marketing costs also plays a key role in reducing customer acquisition costs (CAC). Here are additional strategies related to optimizing marketing processes and costs:

Optimizing the team structure

• Outsourcing. Use freelancers or agencies to perform tasks that do not require a permanent full-time employee (design, copywriting, analytics).

• Cross-functional roles. Train employees to combine several tasks to reduce the need for additional specialists.

• Automation of routine. Implement CRM, task management and analytics tools to reduce the workload of staff.

Centralization and standardization of processes

• Centralized campaign planning. Combine the advertising budget in one department to avoid duplicating costs.

• Material templates. Create ready-made templates for landing pages, banners, email newsletters to save time and money.

• Unified media library. Keep all visual and text materials in one place for fast work for the whole team.

Combine marketing and PR budgets

• Integrated approach. Develop campaigns where PR and marketing reinforce each other (for example, publications in the media, which are also promoted through targeted advertising).

• Paid and free promotion. Support each PR activity with contextual or social media advertising to increase its return.

Use effective tools and technologies

• Inexpensive analogues. Use affordable SaaS solutions for analytics, email marketing automation or advertising management to reduce the costs of expensive corporate programs.

• All-in-one platforms. Save by choosing solutions that combine several functions (for example, HubSpot, Pipedrive or Creatio, which we use in our business).

Optimize your advertising costs

• Set limits. Regularly review budgets and set daily/monthly limits on campaigns with low efficiency.

• Local audiences. Focus on the local market, where your acquisition costs will be lower than on large-scale international campaigns.

• Retargeting instead of cold advertising. Warm up your audience by returning those who have already interacted with the brand.

Reducing intermediaries

• Direct work with platforms. If you place ads in the media, reduce the chain of contractors by purchasing placements through Medialister from directly connected publishers and bloggers.

• In-house analytics. Minimize expenses on third-party agencies by creating an internal team of analysts.

Implementing a Lean approach to marketing

• Testing hypotheses. Launch inexpensive test campaigns before scaling. This will reduce the costs of failed ideas.

• Minimizing “unsuccessful” activities. Use Agile approaches to quickly adjust tactics.

Optimizing the purchase of marketing services

• Long-term contracts. Sign contracts with key contractors to get discounts.

• Competitions for tenders. Organize tenders to select the best offers for services.

• Barter. Use your product or services as payment for advertising or PR services.

Internal team training

• Developing expertise. Invest in employee training to reduce dependence on external consultants.

• Training materials. Create your own instructions and courses for new employees to reduce their adaptation time.

Regular audit of marketing expenses

• Tracking KPIs. Continuously monitor key performance indicators of all campaigns to avoid unnecessary expenses.

• Analysis of results. Conduct quarterly ROI analysis for each channel and budget.

Conclusion

CAC is a strategic tool. This metric helps you realise that growth at any cost can be critical and can lead to bankruptcy. On the contrary, the ability to attract customers on better terms than your competitors is the secret to explosive growth. It is vital for your business's success.