What is customer acquisition cost (CAC)?

Customer acquisition cost (CAC) is the total cost linked with acquiring a new customer. In addition to ad spend, it also includes other marketing expenses and costs linked to the sales team, tools, and platforms you use to convert prospects into customers. Catalog Ads help lower CAC when product feeds are optimised for high-intent shoppers and strong retargeting is in place.

How do you calculate CAC?

To work out your CAC, you first need to define the time period over which you’ll track it e.g. monthly or quarterly. Then, you calculate your total sales and marketing expenses for that period. This will typically include:

• Paid ads

• Content creation

• Software tools like a CRM

• Discounts and promotional offers

• The salaries of your sales and marketing team

Now, you divide the total marketing and sales spend for this period by the number of new customers you acquired during this period. 

For example, if you spent $10,000 on marketing and sales for the month of January and you won 100 new customers during this period, your CAC is $100 for January.  

Why is CAC important in e-commerce?

Like your cost per acquisition (CPA), your CAC helps you predict your return on investment ( ROI). If your CAC is higher than the profit you make per customer, it indicates that you’re in trouble as you’re losing money on every sale. 

It also directly affects your marketing efficiency and scalability. You can use it to measure which channels attract the most valuable customers and optimise your ad budgets strategically. 

If you’re planning to approach investors, they’ll likely want to see your CAC, especially in ratio to your customer lifetime value (LTV). If you have a low CAC with a high LTV, it signals efficient growth, high customer value, and a strong brand presence.    

Which factors can impact your CAC?

Economic conditions

During a tougher economic climate, customers typically tighten their budgets. As a result, they’re more hesitant to buy which will increase your CAC. The reverse is also true. When the economy is favourable, you can expect sales to increase which can lower your CAC. 

Pricing 

E-commerce businesses that sell higher priced products will likely have a higher CAC. This is justifiable, as long as their LTV can support it. 

In addition to your pricing range, strategies like discounts can also increase your CAC. That said, when implemented strategically it can help boost your conversion rate.   

Branding

Businesses boasting strong brand awareness and an established reputation are likely to have a lower CAC than startups or unknown brands. This is because customers see them as more credible and will be more likely to complete their purchase. 

Team efficiency

Longer sales cycles will generally increase your CAC. This is because it will take more time and resources to convert a customer. 

Best practices in measuring CAC

Use a standard formula

To ensure consistency, use a standard formula for calculating your CAC. Double-check that each time you include the same costs. Then, with regards to your total number of customers, make sure that you include only new, first-time customers. Exclude returning or reactivated customers, unless they required similar acquisition spend.  

Assess it alongside LTV

If you analyse your CAC alone, you’ll have an incomplete picture. Always pair it with your LTV. Ideally for every $1 you spent to acquire a customer, you should earn $3 in revenue over their lifetime.  

Benchmark it against your industry

Compare your CAC against industry standards to see if you’re in a healthy range. For example, if you operate in a very competitive industry or you’re selling a complex product, it will be normal for your CAC to be higher than an e-commerce business selling simple plug-and-play products or fast fashion. For this reason, high-end brands, healthcare products, and electronics, for instance, typically have a higher CAC.