Customer Acquisition Cost (CAC) Calculator for Ecommerce
What is Customer Acquisition Cost (CAC)?
CAC measures how much it costs, on average, to acquire a new customer through marketing and sales efforts.
The formula for CAC is:
Customer Acquisition Cost =
Total Cost of Marketing and Sales / Number of New Customers Acquired
Ensure you include all the related expenses for getting your new customers including:
- Paid advertising (SEM, social, display etc.)
- Content/SEO costs
- Marketing agency/contractor fees
- Sales commissions and payroll
- Tools and software for acquisition
For example: If you spent $10,000 total on marketing/sales in a quarter and acquired 1,000 new customers, their CAC would be:
CAC = $10,000 / 250 new customers = $40 per new customer
This is a simple formula, but a critical one. You MUST know your customer acquisition cost.
Why is it so important?
Let’s look.
Importance of Tracking CAC
- It helps you evaluate the effectiveness and return on investment (ROI) of your marketing and advertising campaigns.
- When combined with Customer Lifetime Value (CLV), it reveals if you can affordably and profitably acquire new customers.
- It enables you to identify your most cost-effective acquisition channels and double down on them.
- It’s a key input for forecasting marketing budgets and user acquisition goals.
In short, knowing your CAC will make you more money!
Now we know what CAC is and why it’s important, let’s dive into some guidelines on what is a good CAC (and what isn’t).
What is a Good Customer Acquisition Cost for an Ecommerce Business?
Let me first caveat by saying each business is going to be different (there are just too many variables to account for), but we’re going to look at some general guidelines to help you benchmark what’s good and what’s not.
| Product Price Point | Good CAC Range | Not Good if CAC Exceeds |
|---|---|---|
| Low (Under $100) | $10 – $50 | $75 |
| Mid-Range ($100-$500) | $50 – $150 | $300 |
| High-Value (Over $500) | $150 – $300 | $500 |
To understand what’s good and what’s not good we need to define customer lifetime value (LTV).
Customer lifetime value is the total revenue a business can reasonably expect from a single customer over the entire period that they remain a customer.
| Other Benchmark | Good | Not Good |
|---|---|---|
| CAC as % of Customer Lifetime Value | Less than 33% of LTV | More than 50% of LTV |
| CAC to Average Order Value Ratio | CAC < Average Order | CAC >= Average Order |
| CAC Payback Period | Less than 12 months | Over 12 months |
| CAC to LTV Ratio | At least 3:1 | 1:1 or lower |
The Good CAC Range is determined when the cost to acquire a customer is less than 1/3 of the customer’s lifetime value (LTV).
Deep Dive: CAC (Customer Acquisition Cost) to LTV (Customer Lifetime Value)
The 3:1 CAC (Customer Acquisition Cost) to LTV (Customer Lifetime Value) ratio is a commonly used benchmark for evaluating the long-term profitability and viability of a company’s customer acquisition strategy.
This ratio indicates that a company’s LTV, which is the total revenue a customer will generate over their lifetime, should be at least 3 times higher than the CAC, which is the cost incurred to acquire that new customer.
The reasoning behind this 3:1 benchmark is:
- Recover Acquisition Costs: The LTV needs to be high enough to first recover the upfront CAC over the duration of the customer’s lifetime.
- Generate Profits: Beyond just recovering CAC, there needs to be a substantial remaining lifetime value capture to ensure overall profitability from that customer.
- Account for Churn: Not all acquired customers will stick around long-term, so the LTV from retained customers needs to subsidize those who churn early.
- Allow for Growth Investments: A portion of the excess LTV over CAC can be reinvested into acquiring more new customers while maintaining healthy margins.
For example, if a company’s CAC is $100 per new customer, having an LTV of only $200 means they’d recover the acquisition cost but with minimal remaining profit after churn. A 3:1 ratio would target an LTV of $300 or higher.
A ratio below 3:1 indicates unsustainable economics – either CAC is too high, LTV is too low, or a combination of both. Most successful subscription businesses actually aim for 4:1 or higher LTV:CAC ratios.
Optimizing this ratio is critical as it ensures customer acquisition spending is efficient and provides enough embedded lifetime value to fund future growth profitably.
How to Decrease your Customer Acquisition Costs (CAC)
Here’s 10 ways to help reduce your CAC costs:
- Optimize marketing funnels and conversion rates. By improving ad targeting, messaging, and funnel conversion rates, you can acquire the same number of customers while spending less on ads and marketing. A/B testing is critical here.
- Leverage organic customer acquisition channels. While paid acquisition has explicit costs, organic channels like SEO, content marketing, referrals, and word-of-mouth can be highly effective at a lower CAC over time.
- Increase customer lifetime value (LTV). While not directly lowering CAC, increasing LTV by boosting retention, cross-sells/upsells allows you to sustain a higher CAC while maintaining LTV:CAC ratio targets.
- Improve marketing campaign efficiency. Use better attribution modeling, audience targeting, creative testing to get more conversions out of the same ad spend.
- Negotiate better vendor/affiliate costs. For components like affiliate commissions, influencer fees, you may be able to negotiate better rates at higher volumes.
- Implement multi-touch attribution. Properly credit different touchpoints and channels involved in an eventual conversion to optimize budgets.
- Increase average order values. Higher AOVs increase revenue per new buyer, effectively lowering CAC as a percentage of that revenue.
- Reduce sales/marketing team costs. While important, see if you can operate more lean in areas like sales compensation, agency fees, tools.
- Take advantage of retargeting. It’s often cheaper to retarget website visitors ads than prospecting for net-new audiences.
- Focus on efficiency, then scale. It’s better to optimize CAC first before ramping spend on inefficient campaigns/channels.
The key is constantly analyzing CAC drivers, testing improvements, reallocating budgets to highest ROI channels, and balancing paid/organic acquisition.