Customer Acquisition Costs – What is CAC?
- Start-Up Advice
- Starting a Business
The biggest challenge for start-ups, scale-ups or mature businesses is to find new customers. New customers inject fresh revenue and create a new opportunity for a business to generate repeat business.
For businesses, in particular, tech start-ups operating globally with low/no sales staff on the ground, the marketing budget can be a large portion of the cash expenditure. For this reason, monitoring the costs required to obtain each customer is critical.
These costs are referred to as the Customer Acquisition Costs – or CAC for short.
At a high level, CAC is calculated as the total spent on acquiring customers in a given period, divided by the number of customers obtained during the review period. This allows a business to identify the actual cost of obtaining each new customer.
This definition of CAC is rather broad, so let’s examine the components in more detail:
Total Spent on Acquiring New Customers
This includes marketing costs (such as SEO, SEM, AdWords, social media, print advertising, radio, tv, brochures etc) as well as sales and business development costs (sales staff wages, free trials, discounted offerings.
Number of Customers Obtained
This identifies new customers only. If the business has also lost customers (via natural churn or other reasons) these should be adjusted so as not to impact the number of new customers obtained.
CAC can be calculated for subsets of the business – including geographic spread, specific marketing campaigns or different products. We can also consider isolating viral growth from acquired growth, to have the CAC for acquired customers rather than total customers.
It is also interesting to consider the CAC for a start-up operating a marketplace. In these scenarios, the industry is divided as to who is the customer – the buyer or the seller – who are both engaged in the marketplace.
We’ll examine and continue this debate in another post! For now, get in touch with one of our start-up experts and begin your journey into the life of an entrepreneur.