Ecommerce stores often face varying challenges when it comes to acquiring new customers. Whether due to a highly saturated market, or having to break through the noise to get in front of potential customers, it is imperative that you understand your customer acquisition cost (CAC) and how you can measure the value of your business utilizing this metric.
The average customer for a subscription merchant can be highly valuable. As brands focus more on long-term relationships with their customers, they can see increases in key areas like average order value (AOV) and customer lifetime value (LTV). By comparing CAC to LTV specifically, you can understand not only the value that new customers bring in to your business, but also how you can pull various levers in marketing and sales spending to optimize your subscription business.
This post will define and help you calculate your customer acquisition cost, then dive deep into the various tips and tricks to using this metric as a key indicator of success for your business.
- CAC helps measure the value of bringing on new customers.
- Calculating your LTV:CAC ratio is the leading indicator of your spend to acquisition and if you’re investing enough in your marketing efforts.
- A successful ecommerce company will have a healthy balance of acquiring new customers to retaining existing customers.
What is customer acquisition cost?
Customer acquisition cost (CAC) is how much it costs you, the business, to acquire a new customer to purchase your goods or services. The costs associated with acquisition can look like marketing and advertising dollars, sales commissions and salaries, and any other money that goes into capturing interest from prospective customers. From there, you divide that total dollar amount by the number of customers you have.
Understanding your CAC can help you not only identify areas of opportunity, but it also can help you streamline operations around a particular sales or marketing activity. For example, if you realize that your customer acquisition cost is high for a particular pay per click (PPC) ad set you’re running, you can repurpose that ad spend to other marketing campaigns that have lower CAC, allowing you to maintain a higher profit margin all around.
How to calculate customer acquisition cost
In its simplest form, customer acquisition cost can be calculated as:
CAC = Dollars spent on sales & marketing efforts ÷ number of customers acquired
Within the “dollars spent on sales & marketing” bucket, you’ll want to be sure to include things like the salaries of your sales and marketing teams (including commissions), your advertising spend, any potential agency fees, field event spend, etc. To optimize around your customer acquisition cost, many businesses break out CAC by campaign.
For example, you could easily analyze the success of a field marketing event by adding up the costs of the prep of the event, the staff that attended, and any additional promotional efforts around it, then divide that total by the number of acquired customers as a result of that event.
Your customer acquisition cost will ebb and flow, however, as customers may convert at a later date. You’ll want to create dashboards that can analyze this metric in real-time to get the most accurate representation of how certain sales or marketing activities are performing.
Customer acquisition cost sheet example
To measure and compare the cost of your customers acquired by campaign, you can create a sheet to track the entire process.
|Additional expenses and maintenance||$10,000||$12,000||$13,000|
This can allow you to track the effectiveness of various campaigns and patterns in your expenses over time.
The link between customer lifetime value & acquisition cost
LTV is the metric used to determine how much revenue one customer will generate throughout their entire relationship with you. For subscription ecommerce businesses, LTV tends to be higher than general ecommerce sites, in that they will spend more over the course of their subscription with a brand.
LTV is calculated as:
Customer lifetime value = Average revenue per customer ÷ customer churn
Comparing LTV and CAC can help you determine the viability and health of your business. If your CAC becomes higher than your LTV, your business can not continue to succeed with that ratio. By comparing these two metrics, your LTV to CAC ratio is able to be analyzed.
To calculate the LTV:CAC ratio:
LTV : CAC ratio = LTV ÷ CAC
Successful companies utilize the LTV:CAC ratio to determine spending habits for sales and marketing campaigns and help with understanding the value of each customer compared to how much it cost to acquire them. The ideal ratio is 3:1, though that can fluctuate. As long as the ratio is higher than 1, the customers are likely creating value for your business.
3 factors affecting CAC for your online business
In an ever saturated market, new customers are harder and harder to acquire. To improve customer acquisition cost, you have to find ways to engage with these new customers via your ecommerce website in ways that are unique and memorable. Winning sales means considering the factors that affect your CAC, such as the ones listed below.
1. Cost of goods & services
If you’re seeing that your CAC is too high, you may want to consider increasing the costs of goods and services to account for the value that they will bring in once acquired. By increasing the average order value of new customers, you can offset the high CAC and work to increase their overall LTV.
2. Marketing & sales strategies
If you notice that your CAC for a particular channel or campaign is suboptimal for your overall success metrics, work with your marketing and sales team to see how to pivot the strategy. Testing messaging, channels, or even product offerings can be great ways to see if you can lower the overall CAC for a given initiative.
3. Organic site traffic
Focusing on marketing efforts that cost very little is another great way to affect your CAC in a positive direction. It is likely that your ecommerce site is bringing in a significant amount of your overall web traffic, and as a result, likely converting for you at a solid rate.
Enhancing your organic marketing strategy to focus on SEO, more concise and meaningful content, and overall web performance can significantly impact your CAC. Just be sure to keep an eye on your conversion rates as more traffic visits your shop online.
The US Small Business Administration recommends that an ecommerce store should spend 7–8% of their revenue on marketing costs. However, due to a variety of factors, many ecommerce companies will spend upwards of 20% to attract new customers. Whether due to seasonality, company maturity, or competitive pressures, the fluctuations in that spend will also fluctuate your customer acquisition cost.
You can benchmark your customer acquisition cost against other ecommerce businesses or even traditional retailers. But it doesn’t always paint the clearest picture of how successful you are as it relates to CAC.
Utilizing the LTV:CAC ratio is the most accurate depiction of your business success. As mentioned before, the ideal ratio for an ecommerce business is 3:1. You may think having a higher ratio—like 5:1—is even better. In actuality, it means that you’re spending too little to acquire customers. Focus on increasing the lifetime value of your average customer, while maintaining a 3:1 LTV:CAC ratio to determine how much revenue you should be attributing to your marketing spend and sales tactics.
Customer acquisition cost vs. customer retention
It’s important to remember that your customer acquisition costs (CAC) aren’t the only measure of your value as a company. In fact, studies have shown that it can cost up to five times more to acquire a new customer than to nurture and maintain an existing one. With subscriptions, that is compounded by the fact that you are in the business of long-term customer relationships.
Focusing on keeping your current customers happy further increases their lifetime value. As more customers enter the pool, take the time to create meaningful experiences so their LTV continues to stay high and you can rely on customer loyalty to keep them for the long haul. As your LTV continues to rise, you can invest more dollars into acquiring new customers.
Improving the LTV:CAC ratio to boost online sales
You know how to calculate CAC now and why it’s an important metric to consider when building a business plan to sell products online. Customer costs will always be a part of your budget, whether you sell physical products or offer a service. There are some crucial strategies for lowering CAC that can help your company maximize the business to consumer relationship and win new customers at a lower cost.
To improve the LTV:CAC ratio, consider:
- Bringing core competencies in-house
- Diversifying your social media marketing strategies
- Researching your target audience
- Offering a subscription service to your customers
- Assigning an owner to the LTV metric
- Making decisions informed by data
- Optimizing the customer experience by adding loyalty programs
Attracting online shopping customers to your store
Whether you follow the business-to-business or direct-to-consumer model, at the end of the day, customer acquisition cost is a useful metric to help you determine the health of your company as it relates to acquiring customers. Thinking about the relationship from business to consumer can help your online store make decisions that will boost ecommerce transactions and give you an influx of new customers. Considering LTV in relation to CAC is crucial—when the total cost to acquire a customer is balanced by how much they spend with your store, your company will find success.
 CAC (customer acquisition cost) (Recharge ecommerce glossary)
 Formula To Calculate & Reduce Customer Acquisition Cost (CAC) (ProfitWell)
 LTV/CAC ratio (Recharge ecommerce glossary)
 U.S. Small Business Association (SBA)
 How & why you need to improve LTV:CAC ratio (Recharge)