Customers make business. Thus, it is important for businesses to have a strong game plan to get new customers on board. Finding a repeatable, methodical strategy to draw customers to your business is the goal of customer acquisition.
Today, many web-based businesses can run highly targeted marketing and keep tabs on clients as they convert from warm leads to devoted lifelong customers. Companies and investors both utilize the CAC indicator in this setting.
The overall cost of sales and marketing efforts, as well as any property or equipment required to persuade a consumer to purchase a good or service, is known as the CAC and is a crucial business statistic.
Why is CAC an important business growth metric?
Getting new clients for your business can be either expensive or profitable, depending on the costs involved. The growth of your business won’t be sustainable if CAC is too high compared to Lifetime Value. The reason being it is more expensive to acquire consumers than it will be to profit from each one.
How to consider expenses while developing your client acquisition plan
Imagine you’ve been testing several versions of your advertising to see which would bring in the most money as the busiest time of the year approaches. You ran three ads, and each one brought in 10 clients. If your only concern is client acquisition optimization, you can assume that all three of your advertisements are equal and distribute your budget appropriately.
But is that truly the best perspective to take? Will treating each ad equally enable you to increase your growth? Without a doubt, the answer is no. Carrying it out that way is wholly inappropriate for your company.
Pure client acquisition metrics are common but potentially imprecise instruments for gauging and scaling the expansion of your business. If you want to expand in a scalable and lucrative manner, you must think strategically about more than just acquiring new clients.
How to Calculate CAC
The CAC can be computed by dividing all marketing expenses (costs incurred to attract additional consumers) by the total number of customers gained during that time. Let us check the correct benchmarks for customer acquisition cost by industries in 2023.
Customer acquisition cost formula=
CAC= Total cost of marketing and sales / # of customers acquired
Customer acquisition cost
Lifetime value
Payback periods
Costs in an expanding company should only be seen as investments. Some of them are wise investments, while others are unreal ones. How do you distinguish between the two?
Taking a look at client lifetime value (LTV), which is the amount of money you make from a customer throughout their relationship with your company.
Calculate Your CAC
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How to Use Our CAC Calculator
What is the lifetime value of a customer (LTV)?
The revenue you receive from a specific customer over an extended period is essentially lifetime value. Most companies commonly calculate LTV over 1, 3, or 5 years. If your firm is relatively new, you may model subscription renewal rates (in a subscription business model) or repurchase rates using some reasonably straightforward methods (in a more transactional business).
LTV is a very important measure you can use to supplement your understanding of cost and advance the maturity of your business decision-making. Still, it may be quite difficult to comprehend in a young or digital organization when there isn’t a lot of historical data.
LTV CAC= LTV/ CAC
How does LTV improve your permissible CAC effectively
Marketing professionals may often unlock more funding for their projects by understanding LTV/CAC. For example, it can assist you in deciding if you should be permitted to spend more money obtaining larger clients who would probably keep around longer and pay more overall.
An “allowable CAC” denotes something similar. The maximum allowed payment for a consumer is your permitted CAC.
You will undoubtedly need to invest in client acquisition if your e-commerce business is just starting and understanding the right customer acquisition costs for startups.
However, as you fight to keep clients, you should eventually be able to lower the average cost of acquiring a new customer for your e-commerce business. Consider what is a good customer acquisition cost and prioritize it.
In e-commerce, acquiring customers frequently entails utilizing various digital marketing techniques or platforms. The total cost of sales and marketing for e-commerce businesses would include
E-commerce automation solutions, especially marketing automation, which aids business owners or marketing managers in accelerating their marketing process, are used in several of these marketing strategies.
Assuming that the total cost of the marketing was ₹1,00,000 and the number of sales/purchases was ₹2,000.
The CAC would be ₹50.
For a growing e-commerce business, it is important to that CAC be monitored monthly and quarterly. This will indicate if the business growth is consistent or is fluctuating.
CAC in SaaS businesses
A SaaS company’s Customer Acquisition Costs (CAC) are the costs paid to persuade clients to purchase your software or service. The term “total cost” refers to sales and marketing expenses.
For instance, a SaaS company – ‘YourHELP’ is selling its software product that acts as a technical assistant to engineers. The total spend would include the salaries of their sales and marketing teams, marketing budget, and other miscellaneous expenses.
Let’s assume the total spend is ₹10,000 (for the sake of accuracy and ease of calculation)
And you sold the product to ₹50 engineers.
Keeping the CAC calculation formula in mind:
CAC= Total cost of marketing and sales / # of customers acquired ₹ = 10,000/50
CAC for ‘YourHELP’ = ₹200.
It is important that SaaS founders and marketers keep an eye on this number as it is a direct indicator of business success and growth.
CAC in Fintech
Prospects in this industry need to be well-segmented to target them in the most cost-efficient and effective way possible while also excluding those who are too expensive to acquire (i.e., have a projected LTV/CAC ratio of less than 1).
The total cost in Fintech would include expenses like:
The acquisition of clients through direct external sales (i.e., a physical sales meeting at the prospect’s location),
Acquisition of clients through internal sales (i.e., telephonic communication with the prospect),
Or a complete online sales process with a personalized strategy (i.e., self-onboarding).
In such cases, the CAC for fintech can be calculated by using the formula individually for each of the above categories of marketing expenses OR the sum of all 3 categories can be divided by the number of clients on-boarded.
For instance, the CAC through external sales is ₹5,000 compared to CAC through internal sales, which equals ₹2,000. This indicates that internal sales are the most profitable customer acquisition method.
CAC in EdTech
Because marketing to educational institutions and individual students has special difficulties and complications, the EdTech businesses and its customer acquisition cost in India are often greater than in other industries.
The CAC for edtech was between 20 and 25% before to the pandemic. During the pandemic, when edtech was at its height, the same CAC grew to a staggering 70-80% of the revenue.
A higher CAC compels businesses to overcharge customers for their services.
Here are some strategies you may use to lower CAC in ed tech.
Improve Targeting
Optimise lead generation
Streamline the sales process
Increase customer retention
Distributing CAC through channels
Very small businesses frequently expand using just one strategy or channel (e.g., events). As a result, it’s quite easy to calculate your charges because everything is obvious. However, as your organization becomes more sophisticated, you will have additional channels and methods for potential consumers to connect with your firm, which requires you to begin thinking differently about CAC and customer acquisition cost prediction.
Larger and faster-growing businesses sometimes mix many sets of techniques, each with unique CAC traits, into a broad portfolio of marketing strategies. Some will be extremely inexpensive (like a fantastic blog), while others will cost a lot of money (e.g., bidding on competitor terms in Google Search). You may balance your budget across various components of your portfolio based on the demands of your company by comprehending your CAC at the channel level.
Need to grow quickly at all costs? Even at a high CAC, invest heavily in channels with high volume.
Do you want to maximize a business valuation? To increase the number of clients who will pay you the most over the longest length of time, pay attention to LTV/CAC.
Need to maximize your finances? Look for affordable and quick-payback consumer acquisition strategies.
Tips on How to Improve Customer Acquisition Cost
There are various strategies your company may implement to lower client acquisition expenses in its sector:
1. Boost on-site conversion rates:
To decrease the shopping cart abandonment rate and optimize the landing page, site speed, mobile optimization, and other elements to improve overall site performance, one may set up objectives on Google Analytics and carry out A/B split testing with new checkout systems.
2. Increased user value
The capacity to produce something that users will find appealing is what we mean by the highly conceptual idea of “user value.” Customers may have desired more feature additions or quality in this regard. It could involve executing a change to the current product for better placement or creating fresh revenue streams from current clients. For instance, you could discover that the retention rate and customer satisfaction ratings are positively correlated.
Nearly all profitable businesses with loyal customers use CRM in some capacity. This sophisticated sales staff might use automated email lists, blogs, loyalty programs, and/or other methods to measure client loyalty.
Conclusion-
Understanding your CAC is a crucial first step in creating a successful business. You may pursue business expansion more aggressively the more precise your CAC measures are.
FAQs
1. What is customer acquisition cost?
CAC is the price of convincing a potential consumer to purchase a good or service.
2. Why is the customer acquisition cost so crucial?
Getting new clients Cost helps an organization determine the client’s whole worth to the business. It also aids in determining an acquisition’s ROI.
3. How is customer acquisition cost calculated?
Divide your overall client acquisition costs over a certain period by the number of new consumers you attracted during that same time.
4. What are some common factors that contribute to customer acquisition costs?
The most accurate way to estimate the whole cost of obtaining a new client is to use customer acquisition cost. In general, it should consider factors like advertising expenses, marketing salaries, salesperson expenses, etc., divided by the number of clients attracted.
5. Is there an ideal customer acquisition cost?
Businesses most frequently compare their customer acquisition costs to customer lifetime value. Generally speaking, a CAC: LTV ratio of 1:3 is considered a decent ratio, albeit it will change widely for various firms.
6. How does customer acquisition cost vary by industry?
Due to various factors, including but not limited to: Purchase value, Purchase frequency, Customer longevity, and Company maturity, customer acquisition cost varies between sectors.
7. How does customer acquisition cost impact customer lifetime value?
The link between a customer’s lifetime value and the cost of obtaining that customer is measured by the Customer Lifetime Value to Customer Acquisition Cost (LTV: CAC) ratio. By dividing your LTV by CAC, you may determine the LTV: CAC ratio. A sign of profitability is LTV: CAC.
Watch: Why Customer Acquisition Cost (CAC) Matters & How to Prioritize It
For Curious Minds
Customer Acquisition Cost (CAC) represents the total investment required to convert a potential lead into a paying customer, providing a direct measure of your growth engine's efficiency. Understanding it is fundamental because it reveals whether your business model is economically viable or if you are spending too much to acquire unprofitable customers. A high CAC without a corresponding high customer value indicates an unsustainable path. A comprehensive view of CAC includes all related expenses, not just ad spend. For instance:
Salaries: Your marketing and sales teams' compensation is a major component.
Tools and Software: The cost of your CRM, marketing automation platforms, and analytics tools must be factored in.
Overhead: This includes any portion of office rent or other general expenses allocated to sales and marketing efforts.
A clear and accurate CAC calculation is the first step toward building a predictable and scalable business, offering insights that are explored further in the full article.
Customer Lifetime Value (LTV) estimates the total revenue a business can expect from a single customer account throughout your relationship, giving critical context to acquisition spending. The LTV/CAC ratio is a superior indicator of success because it measures the return on investment for each dollar spent on customer acquisition, directly linking marketing efforts to long-term profitability. A business could have a high CAC, but if its LTV is substantially higher, the model is healthy. For example, an ideal LTV/CAC ratio is often cited as 3:1 or higher, meaning for every dollar you spend acquiring a customer, you generate three dollars in return. Focusing on this ratio prevents the common mistake of chasing cheap acquisitions that result in low-value, high-churn customers, which is a key strategic point detailed within our complete guide.
Simply comparing the number of new customers is a superficial analysis that can lead to poor budget allocation. A fintech company should use the LTV/CAC ratio to identify the most profitable acquisition channel, as it reveals the long-term value generated relative to the cost. The superior campaign is the one that produces customers with a higher LTV, even if its initial CAC was slightly greater. For example, Campaign A might have a CAC of $50 and attract customers with an LTV of $150 (a 3:1 ratio). Campaign B might have a lower CAC of $40 but attract customers with an LTV of only $100 (a 2.5:1 ratio). Despite acquiring customers for less, Campaign B is less profitable. This deeper analysis ensures you invest in channels that attract high-value customers, not just a high volume of them. Discover how to apply this evaluation method by exploring the full content.
For a B2B company like Razorpay, the Customer Acquisition Cost calculation is often more complex due to longer sales cycles and higher-touch acquisition strategies compared to a B2C model. The total cost includes not just digital ad spend but also significant investments in relationship-building and direct sales, which must be accurately tracked to understand profitability. Key costs included in their CAC calculation would be:
Sales Team Compensation: Salaries, commissions, and bonuses for account executives and sales development representatives.
Content Marketing and SEO: Costs associated with creating whitepapers, case studies, and blog posts aimed at business decision-makers.
Industry Events and Partnerships: Sponsorships and booths at fintech conferences to generate high-quality leads.
Elaborate Onboarding Support: The cost of technical and support staff who help integrate new business clients.
Understanding these B2B-specific costs is critical for accurately gauging the effectiveness of an enterprise acquisition strategy, a concept we examine more closely in the full text.
Successful DTC brands master the LTV/CAC ratio by focusing on both efficient acquisition and exceptional customer retention, creating a flywheel of profitable growth. They understand that a low CAC is only half the equation; maximizing the value from each customer is what builds a defensible business and allows them to outspend competitors. Market leaders consistently employ several key strategies:
Building a Strong Brand Community: This fosters loyalty and word-of-mouth referrals, which is a zero-CAC acquisition channel.
Implementing Subscription or Loyalty Programs: These tactics increase purchase frequency and predictability, directly boosting LTV.
Leveraging First-Party Data: By using customer data for personalized email and SMS marketing, they drive repeat purchases at a very low cost.
Their ability to maintain a healthy LTV/CAC ratio, often above 3:1, is a clear indicator of a strong business model, allowing for sustained investment in growth. You can learn more about these proven strategies in the complete article.
Calculating your initial Customer Acquisition Cost is crucial for setting a baseline to measure and improve upon as you grow. It provides an early warning if your customer acquisition model is unsustainable, allowing you to pivot before depleting your resources. Here is a straightforward plan to get started:
Sum All Acquisition Costs: Over a specific period (e.g., one month), add up every dollar spent on marketing and sales. This includes ad spend, content creation costs, marketing employee salaries, and software subscriptions.
Count All New Customers: In that same period, tally the total number of new, unique customers who made their first purchase.
Divide Costs by Customers: The formula is simple: Total Sales & Marketing Costs / Number of New Customers Acquired = CAC.
Tracking these metrics from the beginning is non-negotiable for building a business on solid financial ground. Dive deeper into refining this calculation as your business matures by reading the full post.
With rising digital ad costs, businesses must shift from a volume-based acquisition mindset to a value-based one, where profitability per customer is paramount. The LTV/CAC ratio becomes the central navigation tool, guiding companies to invest only in channels and customer segments that yield a sustainable return, even if the initial acquisition cost is higher. Key strategic adjustments include:
Diversifying Acquisition Channels: Reducing reliance on a single platform by investing in SEO, content marketing, and affiliate programs.
Focusing on Customer Retention: Shifting budget towards initiatives that increase LTV, such as loyalty programs and enhanced customer service, making each acquired customer more valuable.
Optimizing Conversion Rates: Improving website and landing page performance to maximize the number of customers from existing traffic.
This strategic pivot ensures that growth remains profitable despite market-wide cost inflation, a critical consideration for future planning detailed in the complete analysis.
The most damaging mistake is using a 'loaded' or incomplete CAC calculation that only includes direct marketing ad spend while ignoring other significant costs. This creates a misleadingly low CAC, leading to overinvestment in unprofitable channels and a false sense of security about the business's financial health. A proper calculation must be comprehensive. Forgetting to include costs like the salaries of your sales and marketing teams, the expense of creative production, or the subscription fees for your marketing technology stack will dramatically understate your true acquisition cost. This oversight can mask severe issues in your unit economics until it's too late to correct them. The full article provides a checklist to ensure your CAC calculation is accurate and complete, preventing this common pitfall.
Companies often fixate on lowering CAC because it is a simple, tangible metric that seems to represent marketing efficiency. This narrow focus can lead them to pursue cheap acquisition channels that attract low-quality, high-churn customers, ultimately damaging long-term profitability and brand reputation. The strategic solution is to optimize for the best LTV/CAC ratio, not just the lowest CAC. This requires a shift in perspective:
Segment Your Customers: Analyze which acquisition channels bring in customers with the highest LTV and focus your budget there, even if their CAC is higher.
Track Post-Acquisition Behavior: Monitor metrics like repeat purchase rate, churn, and product usage to identify the true value of customers from different sources.
Align Marketing and Sales: Ensure both teams are incentivized based on the quality and lifetime value of the customers they bring in, not just the quantity.
Balancing cost and quality is the hallmark of a mature growth strategy, a topic we explore with more examples in the full guide.
The LTV/CAC framework transforms marketing from a cost center into a predictable profit driver, which is a powerful way to justify budget requests. By presenting a clear ratio, such as 3:1, marketers can demonstrate that every dollar invested in their campaigns generates three dollars in long-term revenue for the company. This data-driven argument is far more persuasive than focusing on vanity metrics like clicks or impressions. To investors and leadership, the LTV/CAC ratio is a direct indicator of the business's scalability and capital efficiency. A strong ratio signals a healthy business model with solid unit economics, proving that additional investment will lead to profitable growth. Presenting marketing plans through this financial lens aligns your goals with executive priorities, making it easier to secure the resources you need. The full post offers more tips on communicating these metrics effectively.
In hyper-competitive markets like Indian fintech, established players such as PhonePe have already invested heavily to acquire a massive user base, driving up the baseline Customer Acquisition Cost for everyone. For a new entrant, this high CAC acts as a formidable barrier, as they must spend aggressively just to gain initial traction, often at a loss. This dynamic creates a challenging environment for newcomers. The initial cash burn required to compete is immense, and without deep pockets, a startup can quickly run out of capital before reaching a sustainable scale. Furthermore, incumbents have the advantage of a large existing user base, which they can monetize to offset acquisition costs and fund further growth. A new player's survival depends on finding a niche acquisition channel with a lower CAC or a business model with a much higher LTV. Explore how market dynamics influence acquisition strategy in our full report.
The decline of third-party cookies is fundamentally changing how B2C companies track and attribute customer acquisition, making traditional CAC calculations more challenging and potentially less accurate. As visibility into the top of the funnel decreases, businesses will be forced to adapt their strategies and measurement frameworks to this new reality. This will necessitate a strategic shift toward:
Investing in First-Party Data: Companies will need to build direct relationships with customers through email lists, loyalty programs, and apps to gather their own data.
Relying on Marketing Mix Modeling: Broader statistical models will become more important for understanding the impact of different channels without individual-level tracking.
Focusing on Brand Building: Investments in brand marketing, which are harder to attribute directly, will become more critical for driving organic, untrackable acquisition.
The future of CAC measurement will be less about perfect attribution and more about understanding blended costs and directional impact, a trend we analyze more deeply in the full article.
Chandala Takalkar is a young content marketer and creative with experience in content, copy, corporate communications, and design. A digital native, she has the ability to craft content and copy that suits the medium and connects. Prior to Team upGrowth, she worked as an English trainer. Her experience includes all forms of copy and content writing, from Social Media communication to email marketing.
Growth Strategy and Planning
