Customer Acquisition Cost (CAC) measures the cost of converting a potential lead into a customer. Businesses will use this metric to determine their profitability because it compares the amount of money, they spend on attracting customers against the number of customers they gained.
We can calculate customer acquisition cost by using this formula: Customer Acquisition Cost = Cost of Sales and Marketing divided by the Number of New Customers Acquired.
If you are not sure of what your "cost of sales and marketing" may be, consider the following expenses for this metric.
a. Ad Spend: Ad spend is the money you are spending on advertisement. For some businesses, advertising is a great way to attract new customers, but it is important to invest in campaigns that will resonate with your target audience. If you're not sure whether you're getting a good return on a marketing campaign, you can calculate its value by dividing the revenue that's produced by advertisement by the amount of money you spent on that campaign.
b. Employee Salaries: Great employees are always worth the investment. So, pay close attention to how you approach this cost if you feel it is too high. There may be alternative options for reducing money spent on salaries, other than issuing pay cuts or layoffs. For example, chatbots and marketing automation can supplement your team's workflow and improve your company's overall productivity.
c. Creative Costs: Creative costs are what you spend on creating content. This could be money spent on acquiring talent to promote your company or it could be what you spent on lunch for your team meeting. All these costs factor into content production.
d. Technical Costs: Technical costs refer to the technology that your marketing and sales team use. For example, if you purchased a reporting tool that tracks the progress of your open deals, that would be a technical cost.
e. Publishing Costs: Publishing costs are what is spent to release your marketing campaign to the public. This could be money spent on TV airtime, paid social media ads, or a spot in a newspaper or magazine.
f. Production Costs: Production costs are the costs associated with physically creating content. If you are making a video, you need to buy a camera, create a set, edit the video, etc. These costs add up, especially if you are paying a third-party to produce your content.
g. Inventory Upkeep: Even if you're a SaaS business, you'll have to spend money on maintaining and upkeeping your products. If you are providing software, this is the money you spend on updates and patches to the user experience.

To calculate customer acquisition cost, the first step is to determine the time period that you're evaluating for (month, quarter, year). This will help you narrow down the scope of your data. Then, add together your total marketing and sales expenses and divide that total by the number of new customers acquired during the time period. The result value should be your company's estimated cost of acquiring a new customer.
For example, let us say your company spends $500K on sales and $300K on marketing. Additionally, your company generated 800 new customers during the last fiscal quarter. If we were to calculate the CAC for your business, the cost to acquire a customer for that quarter would be $1K ((500K + 300K)/800= 1K). Once you have calculated CAC for your company, you can compare this value against other key business metrics. By doing so, you will uncover important insights about your marketing, sales, and customer service campaigns.
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