One of the most important numbers for a business to know is how much it costs to acquire a customer.
In the marketing world, we call this your Customer Acquisition Cost, or CAC for short.
Knowing your CAC is important because it tells you if your marketing is currently profitable, because your CAC is less than what you make from a customer.
As marketers ourselves, we also recommend that you try to break down your acquisition costs by channel (as best you can) so you understand which channels are profitable and which are not. Often, we find that one channel carries the burden of all of the other channels. Knowing this will help you make better decisions about your marketing spend allocation.
The formula for Customer Acquisition Cost is simple – you divide all of the costs of acquiring a new customer (ad spend, people) by the number of customers acquired in that period.:
Here it is as a formula:
If you spend $10,000 on marketing in a month (don’t forget to take people costs into account as well, not just what you spend on ads/content/etc) and acquire 100 customers, your CAC is $100.
Whether CAC is profitable for you depends on your business and its profit margins.
Is $100 a good CAC for the above business? Maybe.
If they make $200 a year on a customer but have 10% profit margins, they spend $100 to make $20. Not profitable.
But if they spend $100 to acquire a customer who pays them $2,000 per year and their profit margin is still 10%, they make $100 per customer every year.
That is profitable and scalable!
As you can tell from above, a “good CAC ratio” depends on the individual business.
That said, people often say that “a good CAC ratio” is 3:1. If you make $300 per customer per year, then a $100 CAC is a “good” CAC ratio.
But run your own numbers, because this may or may not be profitable for your business.