CAC (customer acquisition cost)
What is CAC (Customer Acquisition Cost)?
Customer Acquisition Cost (CAC) refers to the total amount a business spends to acquire a new customer. This includes expenses related to marketing, advertising, sales efforts, and potentially customer support or onboarding costs. CAC is a vital ecommerce metric that helps businesses understand how efficiently they’re converting potential customers into actual buyers.
How is CAC calculated?
The formula for calculating CAC is:
CAC = Total cost of acquiring customers ÷ Number of new customers acquired
This figure can help businesses assess the return on investment (ROI) of their acquisition strategies and guide decisions on budgeting, pricing, and scaling.
CAC vs. LTV: Why context matters
While CAC is useful on its own, it becomes truly meaningful when analysed alongside Customer Lifetime Value (LTV): the total revenue a business expects to earn from a customer over the course of their relationship. For a business model to be sustainable, the LTV should significantly exceed the CAC. This ratio is especially crucial for subscription-based businesses, where recurring revenue over time can offset a higher upfront acquisition cost. A healthy LTV:CAC ratio not only indicates profitability but also shows that a company is acquiring customers efficiently and retaining them effectively.
Why tracking CAC matters
Understanding and optimising CAC allows ecommerce businesses to:
- Allocate marketing budgets more effectively
- Identify the most profitable customer acquisition channels
- Predict profitability as they scale
- Improve overall customer acquisition strategies
Monitoring CAC regularly, alongside complementary metrics like AOV, churn rate, and LTV, provides a fuller picture of a company’s growth potential and long-term viability.
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