Customer acquisition cost

Customer Acquisition Cost (CAC) is the cost associated in convincing a customer to buy a product/service. This cost is incurred by the organization to convince a potential customer. This is an important business metric. It plays a major role in calculating the value of the customer to the company and the resulting return on investment (ROI) of acquisition. The calculation of customer valuation helps a company decide how much of its resources can be profitably spent on a particular customer. In general terms, it helps to decide the worth of the customer to the company.

Numerically, customer acquisition cost is typically expressed as a ratio — dividing the sum total of CAC by the number of additional patrons acquired by the business as a result of the customer acquisition strategy.

Relevance

Customer Acquisition Cost will typically increase as a business matures. It is also typical to see a diminishing return on CAC as a business grows in size and possibly geographical distribution. At some point, a given customer acquisition strategy will no longer be beneficial - this means that the financial rate of return that can be expected to accompany new customers is surpassed by the cost of acquiring those customers in the first place. Most businesses wisely choose to adopt a different strategy for customer acquisition before this point is reached.

Customer acquisition cost can be used in conjunction with SaaS, B2B software sales and startups. As customer acquisition costs seem to increase daily, the importance of LTV also rises. The metric is mentioned in the publications of venture capital firms such as Accel Partners, Bessemer Venture Partners or Matrix Partners. The CAC ratio also appears in business oriented magazines such as Forbes and Inc.com.

See also

• Customer acquisition management
• Customer lifecycle management
• Performance metric
• Controlling
• Marketing
• Sales
• Venture capital
• Software as a service (SaaS)

References

• Chen, Pei-Yu (Sharon); Hitt, Lorin M. (2000), "Switching Cost and Brand Loyalty in Electronic Markets: Evidence from On-line Retail Brokers" (PDF), Proceedings of International Conference on Information Systems {{citation}}: Missing or empty |title= (help)

• Domingos, Pedro; Richardson, Matt (2008-11-02), "Mining the Network Value of Customers" (PDF), Proceedings of the Seventh International Conference on Knowledge Discovery and Data Mining, ACM Press, pp. 57–66 {{citation}}: Check date values in: |year= / |date= mismatch (help); Missing or empty |title= (help)

• Botteri, Philippe (2008-03-02). "Measuring sales and marketing effectiveness of SaaS companies: The CAC Ratio".
• Botteri, Philippe (2008-11-02). "One Number to Manage Your SaaS Sales &Marketing Spend: The CAC ratio" (PDF). Bessemer Venture Partners. Archived from the original (PDF) on 2013-07-17. Retrieved 2013-01-21. {{cite web}}: Unknown parameter |dead-url= ignored (|url-status= suggested) (help)
• Gruher, Scott (2011-09-24). "Go to Market Strategy: How Much Are Your Customers Worth?".
• Haden, Jeff (2011-12-27). "4 Business Metrics You Can't Afford to Ignore". Inc.com.
• Hasan, Emad (September 2018). "Predicting Lifetime Value (LTV) Before a Prospect Becomes a Customer" Retina.ai.
• Hsu, William (2012-08-23). "New Rules For E-Commerce". Forbes.com.
• Rouse, Margaret (March 2010). "Customer acquisition cost". TechTarget.
• Skok, David (2010-02-17). "SaaS Metrics – A Guide to Measuring and Improving What Matters".