Data insights
14. januar 2021
What is CAC?
CAC is an abbreviation for Customer Acquisition Cost, and it is a qualitative performance indicator (KPI) intended to show the relationship between the money invested and how many customers you have acquired for that money.
Who should use CAC?
All B2B companies where a customer has a value above DKK 25,000 and that work seriously with acquiring new customers should work with CAC.
However, you should only use CAC if you have an approximate idea of what an average customer is worth to your business. If you know what a customer is worth, you will also have a better sense of what a new customer may/should cost.
How to calculate CAC
There is some disagreement about which costs the final “C” represents. My recommendation is therefore to include all costs that you know have a direct correlation with acquiring new customers.
These include things like:
- Ad spend
- Salaries for sales and marketing staff
- Agency and consultancy fees
- Content production
- Telemarketing services
Once you have accumulated your sales and marketing costs, you divide them by the number of new customers you have gained in the period/from the initiative.
(DKK 150,000 in ad spend + DKK 31,000 in consultancy fees + DKK 17,500 in video material) / 12 new customers = CAC of DKK 16,541
How is CAC used?
CAC is a so-called tactical KPI. In other words, a KPI you should not review week to week, but rather quarterly or semi-annually.
The reason CAC should not be reviewed more often is that the KPI requires several figures to calculate—figures that may take a long time to obtain—and we must not overstate the administrative burden of updating our KPIs.
In addition, small fluctuations can make a big difference—just 2 fewer customers than in the example above would increase CAC by 17%.
CAC vs. CPA
Be careful not to confuse CPA (Cost Per Acquisition) with CAC. The two are very different.
CPA is used to measure the cost per lead and not per customer, as CAC does. CPA is (unlike CAC) an operational KPI that can be used week to week to indicate performance in lead acquisition.
The reason CPA is an operational KPI is that it is easier to calculate than CAC. It requires only 2 figures:
- Your ad spend
- The number of leads
CPA is used to measure both the acquisition of warm leads (Marketing Qualified Lead = MQL) and sales-ready leads (Sales Qualified Lead = SQL).
Leads are needed before you can get customers—no one will dispute that. Therefore, CPA functions as a kind of intermediate calculation for CAC.
- DKK 150,000 in ad spend / 145 leads (SQL) = CPA of DKK 1,034 per lead.
- Conversion rate from lead to customer 8% = 12 new customers
In the example above, I get a quick idea of the cost per lead as well as the number of new customers. If it seems off, you can calculate CAC to get the full picture.
High vs. low CAC
Whether CAC is high depends on what the average customer is worth. If a customer is worth DKK 700 on average, then a CAC of DKK 15,000 is very high.
If, on the other hand, a customer is worth DKK 600,000, then a CAC of DKK 15,000 is completely out of this world.
Whether you should have a high or low CAC depends on what you, as a business, want to achieve. A low CAC aims to increase profitability, whereas a high CAC makes it possible to scale your business, as it opens up the option to buy customers at a higher cost—meaning you can afford to buy more of the market. You can read more about that strategy here.
If your customers have a high customer lifetime value (CLV), you should also increase your CAC so you can acquire more customers who can generate more revenue over time.
