How to Calculate Customer Acquisition Cost (CAC)

One of the essential questions that every business owner must be able to answer is, “How much does a new customer cost?” Surprisingly, many business owners are unable to answer this question. In my interactions with various business owners, it is remarkable how few can provide this information. 

Many finance professionals and accounting solutions do not prioritize recording data in a manner that makes calculating CAC straightforward. A common issue I encounter is the consolidation of payroll for every employee into a single transaction or account. To accurately calculate CAC, it is crucial to separate all expenses into their respective departments.

Step 1: Categorize Expenses

The first step in calculating CAC is to categorize expenses into logical departments:

1. General Administrative Expenses (G&A)
   • Administrative staff
   • IT solutions/software for the entire company
   • Attorney costs
   • Accounting costs
   • Small purchases
   • Internal meals
   • Rent
2. Research and Development (R&D)
   • Any expenses related to R&D should be recorded separately.
3. Operations
   • Salaries related to delivering services to customers
   • Warehouse fulfillment costs
   • Customer support costs
4. Sales and Marketing
   • Travel expenses
   • Sales and marketing-specific software (e.g., email outreach software, CRM systems)
   • Ad spend
   • External marketing assistance (e.g., graphic design)
   • Promotional materials
   • Sales and marketing payroll
   • Commissions

It’s important to ensure that these expenses are properly categorized to facilitate accurate CAC calculation.

Step 2: Calculate Monthly Sales and Marketing Expenses

Once all expenses are categorized, sum up the total sales and marketing expenses per month. This includes major costs such as ad spend, salaries, commissions, and external assistance.

Step 3: Determine New Customers Acquired

To calculate CAC, you need to know the number of new customers acquired in the same period. Businesses may count new customers differently, but a common method is to count a customer the first month revenue is received. This approach is straightforward and can be easily tracked in the accounting system.

Step 4: Calculate CAC

With the total sales and marketing expenses and the number of new customers acquired, you can now calculate CAC. Simply divide the total sales and marketing expenses by the number of new customers.

CAC = Total Sales and Marketing ExpensesNumber of New Customers

Step 5: Analyze CAC

Understanding your CAC is crucial for evaluating the efficiency of your sales and marketing efforts. By comparing CAC with the average revenue per customer, you can determine how many months it takes to recover the cost of acquiring a customer. Ideally, this period should be no more than three to four months.

If the recovery period is approaching a year, it indicates potential issues in the business model, suggesting that it takes too long to recover the acquisition cost.

Conclusion

Calculating CAC provides valuable insights into your business’s health and efficiency. By categorizing expenses accurately and understanding your CAC, you can make informed decisions about your sales and marketing strategies. This fundamental metric also plays a critical role in more advanced calculations, such as Lifetime Value (LTV) over CAC, which will be covered in a future article.

Stay tuned for our next article, where we delve into calculating customer churn and its impact on LTV. Thank you for reading!