Customer Acquisition Cost, or CAC is the total expense incurred to acquire a new customer. This includes marketing costs, sales expenses, and any other efforts used to attract customers. Essentially, it’s the price you pay to get someone to buy your product or service.
Understanding your CAC is vital because it directly impacts your profitability. If your CAC is too high, you may be spending more to acquire customers than you’re earning from them. This can lead to unsustainable business practices and financial losses.
Suppose you run an online store selling premium coffee.
In one month, you spend $5,000 on online ads, social media campaigns, and sales team salaries.
During that month, you acquire 50 new customers.
Your CAC would be $5,000 divided by 50, which equals $100.
Now, if each customer, on average, spends $150 on your products and your profit margin is 40%, you make $60 per customer.
In this case, your profit from each new customer is lower than the CAC, which means you're losing money.