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Amol Ghemud Published: August 14, 2018
Summary
Know the importance of understanding the marketing portion of CAC for efficient resource allocation. Here, we detail the calculation process, which involves dividing marketing costs by the total sales and marketing costs, providing a clear picture of the financial impact of marketing efforts on customer acquisition.
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Customer Acquisition Costs (CAC) – what you pay on average to acquire new customers – is obviously pretty darn important. But knowing what portion of your total CAC relates to marketing is also really important.
This metric is called your Marketing Percentage of Customer Acquisition Cost (M%-CAC).
WHAT IS MARKETING PERCENTAGE OF CAC?
Marketing Percentage of Customer Acquisition Cost (M%CAC) is most simply defined as:
The metric that shows the marketing portion or your customer acquisition cost (CAC), calculated as a percentage of your overall CAC to reveal how much your company is spending on marketing as it relates to what you spend to acquire new customers.
Given this definition, we can see that a lower M%CAC is better than a high one.
Like some of the other cost-based metrics we’ve discussed, it’s a relatively simple formula that involves few variables.
WHY IS MARKETING PERCENTAGE OF CUSTOMER ACQUISITION COST (CAC) IS IMPORTANT?
M%CAC is important to companies executing marketing programs because it reveals the impact the marketing team’s performance and spending has on overall customer acquisition costs.
The results can help spur more strategic marketing and sales decisions.
For example, a higher MARKETING PERCENTAGE OF CUSTOMER ACQUISITION COST could mean:
Your marketing team is spending frivolously or has high overhead.
Your sales team is not performing very well, thus receiving lower or fewer commissions.
You are in a start-up/investment cycle – intentionally spending more to impact your lead volume, quality and team productivity.
HOW TO DETERMINE MARKETING PERCENTAGE OF CUSTOMER ACQUISITION COST
Now, on to the math.
Again, this is a pretty simple formula, requiring you to know the following numbers by month, quarter and year.
Marketing Cost
For marketing, this will include expenses, salaries, commissions, outside agency fees and the marketing department’s overhead; for sales, it will include sales salaries and commissions, any sales-related overhead and all of your sales expenses.
Don’t forget to include bonuses, program and advertising spend and any other relevant costs in the appropriate categories as well.
Sales & Marketing Cost
All program & ad expenses + salaries + other compensation + overhead for BOTH marketing and sales departments.
Now, to determine your M%CAC, take your Marketing Cost and divide by your total Sales & Marketing Cost (that you used to find your CAC).
Here is the Marketing percentage customer acquisition cost formula:
Let’s say that your total marketing costs came out to around $200,000 after you added in all of your expenses. Sales costs came in at $300,000. When you add those together you get a combined cost total of $500,000. Divide your $200,000 marketing cost by this $500,000 total and you get the following:
$200,000 / $500,000 = 0.4
You can then multiply this by 100 and get a M%CAC of 40%, indicating that 40% of your total CAC was spent solely on marketing.
Calculate Marketing % Of Customer Acquisition Cost
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How to Use Marketing % Of Customer Acquisition Cost Calculator?
TRACKING MARKETING % OF CUSTOMER ACQUISITION COSTCHANGES
You’re already tracking your CAC, so you can evaluate how much you spend on average to bring in a single client or customer. Tracking M%CAC is important as well, because it gives you the data you need to analyze your spending patterns. When your CAC rises, it does so for a reason, and M%CAC helps you determine what that reason is.
Whatever timeframe you use to calculate your CAC, use the same timeframe to calculate M%CAC. If you don’t, your numbers will end up skewed and your percentage won’t accurately reflect your sales/marketing split in your CAC. Make a habit of tracking your M%CAC each time you recalculate CAC. You can even add the formula to your Excel spreadsheet so that M%CAC is calculated automatically each time you calculate CAC.
USING MARKETING % OF CUSTOMER ACQUISITION FOR ANALYSIS
When CAC increases, M%CAC shows you whether the increase was a result of marketing cost increases or sales cost increases.
An increase in M%CAC shows that the balance between marketing and sales costs has shifted in favor of marketing; it means that your CAC went up because you’re spending more on marketing than you used to. Likewise, a M%CAC decrease shows that the balance shifted in favor of sales and sales costs are going up.
Before you take drastic action, however, make sure that your company isn’t currently in an investment cycle. Investment costs can also drive up CAC, and slashing budgets during an investment cycle just results in your business suffering from a lack of much-needed funds for marketing and sales.
If you’re just starting out or you need to overhaul your existing marketing strategy, make sure to familiarize yourself with these 7 important marketing metrics.
Of course, if CAC goes down then M%CAC is used to show which department has experienced increased efficiency during the tracking period. A decreased M%CAC shows marketing costs going down, while an increased M%CAC shows sales costs dropping.
CONCLUSION
Analyzing CAC and M%CAC gives you a lot of information on how efficiently your sales and marketing teams are using their available funding. Keeping an eye on the metrics and their associated trends will show you where you’re overspending and possibly where you’re under-spending as well, giving you an opportunity to change your spending patterns moving forward.
This insight will not only ensure that your company is operating efficiently, but you’ll also save money that can be used for greater investments down the road.
FAQ
1. What does CAC mean in marketing?
consumer acquisition cost, or CAC, is the price associated with gaining a new consumer. The CAC, a crucial business metric, is the total of all costs associated with sales and marketing, as well as any property or equipment required to persuade a client to purchase a good or service.
2. How is CAC calculated in marketing?
The CAC of a company is determined by splitting all sales and marketing expenses by the number of new customers acquired during a given time frame. For instance, Tommy’s acquisition cost for that week would be $1.00 if he spent $10 on marketing his lemonade stands and sold his product to 10 individuals in a single week.
3. What are CAC and LTV in marketing?
The average revenue a single client is expected to produce over their account is known as lifetime value (LTV), also known as customer lifetime value. The average cost of acquiring one client is the customer acquisition cost (CAC).
4. What is CAC used for?
A CAC is necessary to enter government buildings and computer networks and serves as an ID card. A CAC has an embedded microchip that allows email encryption, cryptographic signing, and public key infrastructure (PKI) authentication tools. It is roughly the size of a regular debit card.
5. What is a good CAC?
What is a desirable CAC: LTV Ratio? The LTV/CAC ratio should ideally be 3:1, meaning you should earn three times as much as you would have to spend to acquire a customer. Your company is sending a smoke warning if your LTV/CAC is less than 3!
Watch: How to Calculate Marketing Percentage for Customer Acquisition Cost (CAC)
For Curious Minds
Calculating your M%-CAC reveals the precise portion of customer acquisition spending driven by marketing, offering a clear lens into the financial efficiency and strategic alignment of your growth teams. It moves beyond a simple total CAC to show how your acquisition budget is allocated between marketing and sales efforts. A higher percentage is not inherently negative, as it may reflect a deliberate investment period. For a deeper analysis, consider these points: Strategic Insight: A high M%-CAC could indicate an investment in top-of-funnel growth, a conscious strategy to build brand and lead volume for the sales team to convert later. Sales Efficiency Signal: Conversely, a high M%-CAC might signal that the sales team is underperforming, resulting in lower commissions and a smaller share of the total acquisition cost. Operational Bloat: It could also expose inefficiencies, such as excessive marketing overhead or underperforming campaigns that need re-evaluation. By monitoring this metric, you gain a diagnostic tool to assess whether your marketing and sales departments are working in financial harmony. Tracking this figure over time provides the context needed to understand if your spending patterns are intentional or indicative of a problem.
The accuracy of your Marketing Percentage of Customer Acquisition Cost depends entirely on a thorough accounting of all associated expenses, leaving no cost untracked. A comprehensive approach ensures the metric reflects the true investment in acquiring customers, preventing a skewed view of marketing's efficiency. The calculation requires two main totals: Marketing Cost: This includes all marketing department salaries, bonuses, and commissions. It also covers all program and advertising spend, content creation costs, software subscriptions, and fees paid to outside agencies or contractors. A portion of departmental overhead must be allocated here as well. Sales & Marketing Cost: This is the sum of the complete Marketing Cost detailed above and all associated sales costs. Sales costs include salaries, commissions, bonuses, sales-related overhead, and all other sales expenses. Failing to include items like overhead or bonuses can artificially lower your M%-CAC, masking potential inefficiencies. A disciplined and complete accounting provides the foundation for making sound strategic decisions about resource allocation and budget planning.
Choosing between a high or low M%-CAC model involves a strategic trade-off between upfront investment in brand and content versus ongoing investment in sales headcount. The optimal approach depends on your product's complexity, market maturity, and desired sales cycle length. When deciding, weigh these factors: A High M%-CAC (Marketing-Led) approach typically involves significant spending on content marketing, SEO, and advertising to generate a high volume of inbound leads. It aims to build a strong brand presence and a self-sustaining lead pipeline, which can be more scalable long-term. A Low M%-CAC (Sales-Led) model relies on a larger sales team to generate leads through outbound prospecting and direct selling. It often yields quicker, more predictable short-term results but can be harder to scale efficiently due to the high costs of sales salaries and commissions. A company's choice defines its growth engine, and monitoring M%-CAC against overall CAC and LTV is key to ensuring the chosen strategy is not just acquiring customers, but profitable ones.
A 40% M%-CAC is a significant data point, but its meaning depends entirely on context. This figure, calculated from $200,000 in marketing costs divided by $500,000 in total acquisition costs, should trigger a strategic evaluation rather than an immediate judgment. Leaders should use this metric as a starting point to investigate the health of their growth engine. Key diagnostic questions include: Is this intentional? Are we in a planned investment cycle, deliberately spending more on marketing to boost brand awareness, enter a new market, or generate a higher volume of leads for our sales team? How is sales performing? Could the 40% figure be inflated not by high marketing spend, but by an underperforming sales team with low commission payouts, thus reducing the 'sales' portion of the total cost? Where is the marketing budget going? A breakdown of the $200,000 is critical to see if it funds productive campaigns. This 40% figure is a signal, not a conclusion. Analyzing it against historical trends and strategic goals is what transforms this simple metric into a powerful tool.
While a high M%-CAC is often associated with startups, several scenarios can warrant a temporary spike in this metric for established companies. The key is for leadership to frame it as a strategic, time-bound investment rather than a sign of inefficiency. Such situations might include: New Product Launch: Introducing a new product requires significant upfront marketing spend on awareness campaigns, advertising, and content to educate the market and generate initial demand before the sales team can effectively engage. Entering a New Market: Expanding into a new geographic region or customer segment necessitates higher-than-usual marketing investment to build brand recognition and establish a foothold. Competitive Pressure: If a major competitor launches an aggressive marketing campaign, a company may need to temporarily increase its own M%-CAC to defend its market share. In these cases, leadership must communicate the 'why' behind the numbers, presenting the increased spending as a deliberate tactic with clear objectives and a defined timeline for returning to baseline.
A high M%-CAC can be a misleading metric if viewed in isolation, as it can reflect issues within the sales department. When sales commissions are low due to missed quotas, the sales cost component of CAC shrinks, artificially inflating marketing's percentage. To diagnose this, leadership must investigate core sales performance indicators: Lead-to-Opportunity Conversion Rate: If marketing is generating a high volume of qualified leads but the sales team is failing to convert them into pipeline opportunities, this is a major red flag. Quota Attainment Percentage: A low percentage of sales representatives hitting their quotas directly reduces total sales compensation and points to issues with sales effectiveness. Sales Cycle Length: An increasing sales cycle duration can indicate that the sales team is struggling to close deals efficiently, which also suppresses commission-based costs. By cross-referencing the M%-CAC with these sales KPIs, you can correctly identify the root cause of the imbalance and focus corrective actions on sales enablement instead of mistakenly cutting the marketing budget.
To accurately calculate your M%-CAC, you need a disciplined process for capturing every relevant cost, as omissions can create a misleading picture of your marketing efficiency. A thorough audit is the essential first step to establishing a reliable baseline. Here is a practical plan for your B2B firm: 1. Consolidate Payroll Data: Gather all gross salaries, bonuses, and commissions paid to every individual in the marketing and sales departments for the period. 2. Aggregate Program Spend: Collect all invoices and expense reports related to advertising, content, events, and other specific programs. 3. List All Tool and Agency Costs: Compile a complete list of software subscriptions and fees paid to external agencies, consultants, or freelancers. 4. Allocate Overhead: Work with your finance department to assign a proportional share of general company overhead to the marketing and sales departments. Once all costs are gathered, you can confidently calculate your M%-CAC and use it as a tool for strategic financial planning and performance analysis.
Calculating your M%-CAC is a powerful way to frame your team’s spending as a direct investment in customer acquisition. It shifts the conversation from marketing being a cost center to a growth driver. Follow this methodical approach to build a compelling financial narrative: 1. Define Your Costs: Meticulously gather your total Marketing Cost, including your team's salaries and bonuses, all program and advertising spend, agency fees, and your department's share of overhead. 2. Collaborate for Total Costs: Work with the sales and finance departments to get the total Sales & Marketing Cost, which is your marketing cost plus all sales salaries, commissions, and overhead. 3. Apply the Formula: Divide your total Marketing Cost by the total Sales & Marketing Cost. For example, if your costs were $200,000 and the total was $500,000, your M%-CAC is 40%. Present this metric not just as a number, but with context. Explain why it is at its current level and show how it trends over time to demonstrate improving efficiency or the results of strategic spending.
As customer acquisition channels become more expensive, historical benchmarks for an acceptable M%-CAC will likely shift upwards. Companies that fail to adapt their financial models will face eroding margins. This trend implies a necessary pivot in how you think about marketing investment. Businesses should prepare for this future by: Prioritizing Customer Retention: Shifting budget from pure acquisition to loyalty programs can lower the pressure on M%-CAC by increasing customer lifetime value (LTV). Investing in Organic Channels: Doubling down on content marketing and SEO can create more sustainable, lower-cost acquisition channels that are less susceptible to advertising price hikes. Improving Conversion Rate Optimization: Focusing on getting more value from existing traffic becomes even more critical when new traffic is more expensive to acquire. The future of sustainable growth will involve a more balanced approach, where a higher M%-CAC is offset by a stronger focus on efficiency and maximizing the value of every customer.
For a subscription business, tracking the M%-CAC trend over time transforms it from a historical snapshot into a powerful predictive tool. A consistent or declining trend signals efficiency and scalability, while a rising trend can be an early warning of future profitability challenges. You can use this data to inform key strategic decisions: Hiring and Expansion: A stable or decreasing M%-CAC indicates that your marketing engine is becoming more efficient, signaling you can afford to hire more sales and marketing staff to scale up acquisition. Profitability Forecasting: By modeling future revenue based on your customer acquisition rate and LTV, you can use the M%-CAC trend to project future acquisition costs for more accurate profitability forecasts. Channel Investment: If your M%-CAC is rising, analyzing the costs and performance of individual marketing channels can help you decide where to reallocate your budget. By viewing your M%-CAC as a dynamic indicator of your growth engine's health, you can move from reactive management to proactive strategic planning.
A frequent and critical mistake is the exclusion of 'people costs' from the M%-CAC calculation. Many companies only include program and advertising spend in their 'Marketing Cost,' while omitting the salaries, bonuses, and commissions of the marketing team itself. This creates a dangerously incomplete and misleading picture of marketing’s true cost. This error leads to several problems: Artificially Low M%-CAC: By ignoring the largest single expense for most marketing departments, which is payroll, the resulting M%-CAC appears much lower than it actually is. Poor Budgeting Decisions: Leadership might approve new hires without fully understanding their impact on customer acquisition costs. Unfair Performance Evaluation: It makes it impossible to accurately compare the efficiency of different marketing strategies. The solution is to be disciplined and include all marketing-related salaries, compensation, and overhead in your Marketing Cost calculation to ensure your M%-CAC is an honest reflection of your investment.
A consistently high M%-CAC can be alarming, but reacting by simply slashing the marketing budget is often a mistake. Instead, leadership should use the metric as a prompt for a deeper investigation. The first step is to ask the right questions to diagnose the underlying issue. The three most critical initial questions are: 1. What is our current strategic focus? Are we in a high-growth or investment phase where a high M%-CAC is expected and intentional, such as during a new market entry? 2. How does our sales team's performance factor in? Is the marketing percentage high because marketing is overspending, or because the sales team is underperforming, resulting in lower sales costs like commissions? 3. What is the ROI on our marketing spend? Before cutting costs, analyze which specific marketing programs are driving the highest quality leads. A high M%-CAC might be driven by effective but expensive channels that are worth the investment. These questions help you move beyond a surface-level reaction to find the core issue.
Amol has helped catalyse business growth with his strategic & data-driven methodologies. With a decade of experience in the field of marketing, he has donned multiple hats, from channel optimization, data analytics and creative brand positioning to growth engineering and sales.
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