Customer Acquisition Cost, or shortly CAC, is the fee associated with convincing a consumer to buy your product or service, including research, marketing and advertising costs. Customer Acquisition Cost is an important business metric. In simple words, the CAC metric shows how much money company should pay for sales and marketing activities to acquire one client.
CAC is a metric, that’s why it can be counted. To calculate the CAC index we need to summarize all sales and marketing expenses and divide this sum by the number of customers, which have been acquired. Also before calculating the index, we need to determine the reporting period. All expenses and numbers are taken for this reporting period. Usually, businesses calculate customer acquisition cost on a monthly, quarterly or annual basis. Customer Acquisition Cost help companies to understand whether they have a viable business model that allows them to maintain a low level of CAC while scaling their business or not. CAC is taken into account along with other data, especially about the cost of the client for the company and the return on investment (ROI) from the acquisition.
As mentioned above, the CAC metric is important. It’s important not only for companies but also for investors. In different companies internal and marketing specialists are interested in CAC metrics. They use it to optimize the return on their advertising and sales investments.
Investors use the CAC metric to analyze the scalability of new internet technology companies. They can determine a company’s profitability by looking at the difference between how much money can be extracted from customers and how much money needed to acquire them. Investors view Internet-based companies through the same lens. They are concerned with the current relationship, not on future promises of improving the metric unless they can be justified.
The history of the term Customer Acquisition Cost is ambiguous. I checked many sources of information and did not find an answer who came up with the term CAC. But I found that this metric was mentioned in the publications of venture capital firms such as Accel Partners, Bessemer Venture Partners or Matrix Partners. I purpose that one of these companies come up with that term. In addition, the CAC ratio also appears in business-oriented magazines such as Forbes and Inc.com.
Customer Acquisition Cost is related to Customer Portfolio Management (CPM). CPM aims to optimize business performance – whether that means sales growth, enhanced customer profitability, or something else across the entire customer base. Also, there are 5 disciplines that contribute to CPM:
- Market Segmentation,
- Sales Forecasting,
- Activity-Based Costing,
- Life Time Value Estimation,
- Data Mining.
Customer Acquisition Cost is one of the based costing activities.
Also, CAC related to such a term as a monetization. They related because when businesses acquire clients they want to get as much money from them as possible. This process usually called customer monetization.
In addition, CAC related to term Customer Lifetime Value (CLV). CLV represents the total amount of money which customer is expected to pay a company, or on company products, services during their lifetime.