The Complete Guide to Customer Acquisition Cost

Customer acquisition describes finding and targeting an audience to engage with your business in a specific way, such as making a purchase.

Successful businesses have detailed customer acquisition strategies comprising various marketing and sales tactics. These tactics are designed to encourage your target audience to become customers.

If done well, your customer acquisition strategy can increase revenue and brand presence, further building your customer database.

Customer acquisition costs indicate how much a business spends to attract new customers compared to its earnings per customer. It’s a valuable metric to track, giving detailed insights into how you use your resources and what rewards they reap.

Accurately calculating CAC helps you determine your overall return on investment (ROI) and assess the effectiveness of your customer acquisition strategy.

The formula for CAC is straightforward: Divide your marketing and sales expenses by the number of new customers acquired in a specific period.

When doing your calculations, remember to include all aspects of your marketing and sales budget:

• Employee salaries: How much it costs to employ marketing and sales teams who have worked on the campaign
• Ad spend: The amount you spent for ad placements and campaign support
• Production costs: The budget for creating content, such as studio hire for video creation
• Product costs: How much it costs to create, maintain, and improve products

While customer acquisition aims to attract new users to your business, customer retention is equally crucial for business growth. It’s not enough to simply bring customers in—you need to activate and retain them to ensure long-term success.

Customer acquisition focuses on introducing your brand to potential customers and convincing them to make their first purchase. However, with rising customer acquisition costs and tighter budgets, it’s important to attract new customers AND ensure they are the right fit for your business. Active and engaged customers are the key to sustainable growth.

On the other hand, customer retention is about nurturing relationships with existing customers to maximize their lifetime value. Retention involves strategies that go beyond the initial sale, focusing on activation, engagement, and ongoing value delivery. Active users tend to offer the highest customer lifetime value (CLV) and provide the best route retention.

For businesses using product-led growth (PLG) tactics, such as those relying on network effects, engaged users are instrumental in acquiring new customers and providing compounding value. Satisfied customers become advocates, reducing acquisition costs and attracting high-quality leads.

The aim of retention is to redefine how you communicate to your customers through tactics like email and content marketing in a way that is less “find out who we are” and more “how can our product continue to help you.” Marketing should concentrate on showing how your services continue to address their pain points and deliver ongoing, tangible benefits.

Reward your existing customers by offering personalized experiences, loyalty programs, and post-purchase support. Communicate with them to find out how they feel about your brand and service, making active changes to benefit the user.

CAC gives product managers a clear picture of how efficiently they’re growing their user base. It’s a key metric influencing many aspects of product strategy and business health.

As CAC directly impacts a product’s profitability and growth potential, product managers can use metrics to help make informed decisions about budgeting, marketing strategies, and overall business planning.

Let’s take a closer look at why CAC is important to product management.

Resource allocation

Knowing your CAC helps you decide where to invest your limited resources. If acquiring new customers is too expensive, you might need to rethink your strategy or product features.

Pricing decisions

CAC influences how you price your product. You must ensure you’re not losing money on each new customer.

Product-market fit

A high CAC could mean your product isn’t resonating with your target audience. These insights can drive product improvements or pivot decisions.

Growth planning

Understanding CAC helps you forecast the cost of expanding your user base, which is essential for planning and securing funding.

Marketing effectiveness

CAC enables you to measure the effectiveness of your marketing efforts. If the number is too high, you may need to try different channels or messages.

Customer lifetime value (CLTV)

By comparing CAC to the value of a customer over time, you can ensure that your business is sustainable.

Investor attraction

Investors look at CAC, which indicates a business's health and potential profitability. A lower CAC can make a company more appealing to investors, as it suggests that the company is using funds efficiently and is more likely to achieve a positive return on investment (ROI).

When calculating CAC, it’s important to try and include all the costs associated with acquiring a new customer. This data gives you a more accurate idea of what you’re really spending to grow your customer base.

These types of costs might include:

• Marketing expenses: Advertising, content creation, SEO and website optimization, event sponsorships, and trade shows
• Sales costs: Salaries and commissions for the sales teams, sales tools and software, and travel expenses for sales meetings
• Technology: CRM systems, marketing automation tools, website maintenance, analytics, and reporting software
• Personnel: Salaries for marketing team members, hiring, onboarding, and training costs, as well as freelancer or agency fees
• Promotional costs: Discounts or free trials are offered to new customers as well as referral program rewards
• Customer support: Costs associated with onboarding new customers
• Overhead: Office space and utilities for sales and marketing teams, equipment, and supplies

Many companies only focus on obvious expenses like ad spend—but that’s only part of the story.

Costs like staff salaries, software tools, and even office space can all contribute to your ability to attract new customers. By accounting for everything you possibly can, you can get a more accurate and realistic CAC figure.

This comprehensive approach helps in several ways. Firstly, it prevents you from underestimating your CAC, which could lead to poor pricing decisions or unrealistic growth projections.

You’ll also be able to easily identify areas where you might be overspending. Maybe your marketing tech stack is too expensive for the results it’s delivering, or your sales team’s travel costs are out of line with the customers they’re bringing in.

A detailed breakdown of these costs can also reveal opportunities for refinement. You might find that certain marketing channels are more cost-effective than others or that investing in better onboarding could reduce early customer churn. This level of insight is invaluable for making strategic decisions about where to allocate your resources for maximum impact.

Calculating your customer acquisition cost is simple once you have all the necessary data.

The basic formula for CAC is:

CAC = Total Costs Spent on Acquiring Customers / Number of Customers Acquired

Let’s break this down:

1. Add up all your costs: Sum up all the expenses of getting new customers (marketing, sales, technology, etc.) for a specific time period, like a month or a quarter
2. Count new customers: Determine how many customers you acquired during that same time period
3. Divide: Take your total costs and divide this amount by the number of new customers

For instance, if you spent $100,000 on acquisition efforts in a month and gained 500 new customers, your CAC would be $200 per customer ($100,000 divided by 500).

It’s important to calculate CAC regularly and track it over time. The amount can help you spot trends and see how changes in your strategy affect your acquisition costs.

While the CAC formula is relatively straightforward, gathering accurate data is the only way to ensure a correct, reliable result. Make sure you’re capturing all the relevant costs (or as many as you can) and counting new customers consistently—use the same criteria for what counts as an onboarded customer.

Reducing customer acquisition costs is crucial to growing your customer base without negatively impacting your profit.

There are two levers to achieve this: the first is to increase the number of new customers. As already discussed, increasing customer acquisition costs money.

Suppose you already have an abundance of marketing materials. In that case, you can expand your reach by targeting customers who fall outside your initial target demographic but are still interested in your product. Focus on organic channels and push your most engaging and informative content to attract a broader range of customers.

Your other option is to reduce your marketing expenses. This can be done through several means, such as optimizing content to serve existing customers while driving more organic traffic to your site.

CAC aims to find the point where you’re acquiring valuable customers at the lowest possible cost. Advanced funnel analysis provides the insights needed to achieve this balance, helping to drive down your CAC while maintaining or even improving the quality of acquired customers.

Understanding how to analyze and improve the basic customer acquisition funnel stages (awareness, interest, consideration, intent, evaluation, and purchase) is crucial for reducing your CAC. The data you gather about your funnel helps you decide where to invest your acquisition budget for the best returns.

Here’s how your funnel analysis connects and has an impact on CAC.

Conversion rate optimization (CRO)

By using tools to identify conversion drop-off points, you can focus your efforts on improving these stages. Higher conversion rates mean you’re acquiring more customers for the same cost, effectively lowering your CAC.

Channel effectiveness

Analyzing user journeys helps you understand which marketing channels are most efficient at moving customers through the funnel. This information lets you allocate your budget to the most cost-effective channels, reducing overall CAC.

Personalization opportunities

Behavioral cohort analysis can reveal different paths to purchase for various user groups. By tailoring your approach to these groups, you can increase conversion rates without increasing spend.

Predictive CAC

Use machine learning to forecast the likely CAC for different types of leads. This predictive data enables you to focus your efforts on the most promising prospects.

Stage-specific ROI

Understanding the costs associated with each funnel stage allows you to calculate the ROI of improvements at each step and prioritize your efforts for maximum CAC reduction.

Lifetime value (LTV) correlation

Analyze how different funnel experiences correlate with long-term customer value. This insight can help you justify higher acquisition costs for customers likely to have a higher LTV.

A/B testing for cost-efficiency

Continuously test different approaches at each funnel stage using A/B tests. Don’t concentrate solely on improving conversion rates but on finding the most cost-effective ways to take customers through the funnel.

Understanding and improving your CAC can be the difference between a long-standing, growing company and a business that goes nowhere.

Amplitude Analytics provides a powerful set of tools to help you tackle this challenge head-on:

• Funnel and cohort analysis to pinpoint where you’re losing potential customers
• User path mapping to streamline your acquisition process
• Attribution insights for smarter budget allocation
• Behavioral analysis to identify and encourage key conversion rates
• A/B testing to continuously refine your strategies

Using these features, you can gain deep insights into your acquisition process and make data-backed choices to lower your CAC while maintaining customer quality.

Remember—the aim isn’t just to reduce costs but to find the optimal balance between spending and value.