Spending money on marketing requires a delicate balance—you need to get income from new customers in order to justify your marketing expenses. For example, if your business spent $50 on Google ads to gain one new customer, and that customer spends $100 on your products, it was a worthwhile investment. If, on the other hand, you splurge $1 million on a Super Bowl ad and only gain 10 customers who each spend $5, that is a disastrous result for your marketing budget.
This is why companies look at customer acquisition cost, or how much your business spends to gain each new customer.
What is a customer acquisition cost (CAC)?
The customer acquisition cost (or CAC) is the cost of gaining a single new customer. Typically, the majority of your CAC is marketing spend, though production and labor expenses contribute to the total.
CAC is a useful metric for businesses because it lets you quantify and evaluate the success of your marketing campaigns as well as the efficiency of additional operating costs. As a rule of thumb, you want a customer cost that is significantly lower than the amount of money each new customer spends on your product or service.
Why is it important to track CAC?
Tracking your customer acquisition cost can give you a window into your business’s efficiency. If you find that your CAC is consistently less than the money your new customers spend on your products, you can feel confident that your marketing is worth the expense.
If, however, you find that your CAC is consistently higher than the money your new customers spend, then you may need to look for ways to reduce your CAC—which usually means evaluating your marketing costs. Because marketing typically is the largest portion of your CAC and more flexible than production costs, reducing marketing costs is the fastest way to reduce your CAC and achieve a healthier ratio of spending to earning. Many business owners go a step further, using their current CAC numbers to determine in advance how much money they can spend on marketing.
What’s a good CAC? Understanding LTV to CAC
There’s no one good customer acquisition cost—as with most metrics in business, what makes a good CAC is entirely dependent on the industry, business size, target audience, and goals. The only hard-and-fast rule is that, for healthy margins, your customer acquisition cost should be less than the money an average customer spends on your products.
Many successful companies evaluate their customer acquisition cost against another metric: customer lifetime value, or LTV. LTV quantifies the income a customer brings to your business for the duration of their relationship with it (called the average customer lifespan). For example, if your customers typically buy your products regularly over a long period of time, their LTV will be much higher than customers who only purchase a product once. In comparing LTV and CAC, many businesses shoot for an LTV-to-CAC ratio of 3-to-1—in other words, they want the lifetime income from a single customer to be three times more than the cost of acquiring that customer.
If you want to reduce your customer acquisition cost, there are several ways to do it. You can spend less on marketing, either by decreasing your marketing efforts or shifting to more organic marketing strategies, such as implementing a customer referral program or diving into search engine optimization. You could also raise the price of your product or reduce your overhead, called cost of goods sold (COGS), by using less expensive materials or moving to cheaper office space.
Customer acquisition cost by industry
Customer acquisition cost varies significantly by industry—here are some annual average customer acquisition costs broken down by industry, based on data Shopify collected in 2021. All of these figures are for ecommerce brands with fewer than four employees.
- Arts and entertainment: $21
- Health and beauty: $127
- Fashion and accessories: $129
- Home, furniture, and garden: $129
- Electronics: $377
These numbers are averages, meaning they include highs and lows that vary based on business size, goals, target market, and more. Think of them as ballpark figures rather than precise numbers. Industry benchmarks such as these can be more useful for early stage companies that don’t yet have enough internally generated sales data to make exact calculations.
How to calculate your CAC
- Determine marketing spend for a particular period of time
- Identify how many customers you gained
- Divide marketing spend by new customers
- Consider factoring in your other costs
By following these four steps you can calculate customer acquisition costs for your company.
1. Determine marketing spend for a particular period of time
To start calculating your customer acquisition cost, you’ll need a few numbers from past marketing campaigns. Decide what period of time you’d like to examine. This can be a calendar year, a particular campaign, or even a single week. Then determine how much money you spent in marketing and advertising investments during that period.
2. Identify how many customers you gained
Once you know how much you spent on marketing, identify how many customers you acquired during that period. Ideally, you can trace each new customer back to your marketing spend—whether they clicked on a link in a social media post or contacted your sales team after they saw a presentation by your company.
3. Divide marketing spend by new customers
Once you have your marketing spend and new customer totals, simply divide your marketing costs by the number of new customers. The simplified customer acquisition cost calculation, which assumes that marketing costs are the bulk of your overall acquisition costs, is as follows:
Total Marketing Spend / New Customers = CAC
4. Consider factoring in your other costs
For an even deeper look at your customer acquisition costs, factor in the other costs of your operation. These costs, called the cost of goods sold (COGS), include all of the expenses that directly contribute to producing your product, such as raw materials, product development, manufacturing, and labor. The following formula incorporates these costs, giving a more complete picture of your customer acquisition cost:
(Total Marketing Spend + COGS) / New Customers = True CAC
Customer acquisition cost by industry FAQ
Does the size of a business affect its CAC in different industries?
Yes, business size matters when determining customer acquisition cost. Businesses with many employees will spend more to gain customers, since the salaries of their marketing teams (and any other employees in the sales cycle) are an important factor in their CACs, while a business with few employees will spend less. However, large businesses with high marketing costs typically gain more customers from their campaigns, meaning that their customer acquisition costs are usually spread across a larger number of new customers. This ultimately keeps their CAC within a reasonable range.
What are the implications of high CAC in specific industries?
Customer acquisition cost varies widely between different industries. For example, according to Shopify research, businesses in the electronics industry on average spend three times more to acquire a customer than businesses in the health and beauty industry. These numbers don’t mean that electronics companies should try to improve customer acquisition costs, or that either industry is better or worse for individual companies—rather, they simply reflect the different trends in marketing spend per industry.
Disparities in customer acquisition cost by industry reflect a wide variety of factors, including production costs, business size, average purchase value, product prices, customer base, customer LTV, and more.
Is it possible for businesses to reduce their CAC in their respective industries?
Businesses in any industry can reduce their customer acquisition cost by taking a look at the individual variables that make up the CAC formula. If you feel that you have a high customer acquisition cost, the simplest ways to reduce it are to cut your marketing spend (either by decreasing your marketing efforts or shifting to a more organic marketing strategy), raise the price of your product, or reduce your cost of goods sold or your overhead expenses.