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Customer acquisition cost 101: how to calculate and reduce your CAC
When it comes to acquiring new customers and growing your business, the old saying is true: you need to spend money to make money. But how do you know if you’re spending the right amount of money, on the right audience, and on the right channels?
While there’s no magical one-size-fits-all number for how much every company should spend on customer acquisition, there is a handy formula: customer acquisition cost. Calculating your customer acquisition cost lets you quantify exactly how much you’re spending to get new customers, helping you understand the impact of your marketing and sales efforts.
This chapter covers everything you need to know about customer acquisition cost—what it is, how to calculate it, why it matters, and how to reduce it—so you can get the greatest return on investment.
Reduce your customer acquisition cost with Hotjar
Understand what makes people convert—and what stops them—so you can create more engaging campaigns and win more customers.
What is customer acquisition cost?
Customer acquisition cost (CAC) is the amount of money you spend to get a new customer. It includes all of your marketing and sales expenditures, such as ad spend, employee salaries, tech budget, agency fees, and so on—basically, everything you spend money on to attract prospects and convert them into customers.
How do you calculate customer acquisition cost?
To calculate CAC, use the following formula:
CAC = cost of acquiring customers in a given period divided by number of customers in the same period
For example, if you spent $5,000 on sales and marketing in a month and got 100 new customers, your CAC for that period is $50.
You can measure marketing CAC by using only the marketing cost, or get the fully loaded CAC by including all of your acquisition spend (that is, absolutely everything it took to acquire that customer above and beyond your sales and marketing spend. This could include the cost of providing customer support to prospects during their free trial, office space for your teams to work, and administrative expenses).
How often should you calculate CAC?
You can measure customer acquisition cost across any given period: month, quarter, or year. The cadence you choose will depend on your specific goals. For example, if you’re experimenting with a new marketing tactic or sales approach, you may want to calculate your CAC more often at the beginning to understand how it’s working and allow you to course correct as necessary.
However, there are some best practices to bear in mind:
Generally speaking, if you calculate too frequently, such as every month, you’ll get a skewed short-term perspective. For example, valuable investments like adding an impactful tool to your martech stack or making a strategic new hire could look like a catastrophe when viewed short-term, even though they’ll have a long-term payoff.
If you calculate too infrequently, such as yearly, you won’t be able to spot downward trends or issues until it's too late to fix them, meaning you could lose out on major revenue.
For many businesses, calculating CAC on a quarterly basis provides the right level of insight, allowing teams to see the bigger picture but still be responsive to any shifts before they become problems.
What is a good CAC?
Your customer acquisition cost on its own is just a number. To really understand what it means for your business, you need to look at it in context alongside another metric (and fellow acronym): LTV.
Customer lifetime value, also known as LTV or CLV, is the amount of revenue a user is predicted to contribute over the entire course of your business relationship.
You’ll often see LTV mentioned alongside CAC because comparing these two numbers gives businesses an important insight into their profitability. For most businesses, the sweet spot is a LTV:CAC ratio of 3:1. That means for every $1 you spend acquiring a customer, you get $3 in revenue.
If the ratio is too low (say, 1:1), you won’t be able to sustain growth: you’re spending as much to acquire a customer as they spend on your business, meaning there’s no room for profit.
If it’s too high (like 5:1 or higher), it could also be a sign that something is wrong. In this case, an extremely high LTV:CAC ratio indicates that you could be reaching more right-fit customers, and should consider increasing your marketing and sales spend to take advantage of this growth potential.
🤔 What’s the difference between CAC and LTV?
Customer acquisition cost reveals how effective your customer acquisition strategies are, while customer lifetime value is a good indicator of loyalty, retention, and customer satisfaction.
Both business metrics are important, and they’re particularly useful when used together. After all, a constant stream of new customers is no good if they just end up churning. Understanding CAC and LTV together helps you ensure your customer acquisition and customer retention strategies pay off.
3 important reasons to track your CAC
1. Understand your business’s performance
As we’ve just seen, customer acquisition cost is one of the most important SaaS metrics because it’s directly linked to your profitability and business growth. While it’s not the only thing to look out for, it’s a useful indicator of how well your marketing efforts pay off and whether your campaigns resonate with your audience.
Monitoring your CAC can also signal wider business and industry trends, including external factors like seasonality or economic circumstances, that may affect your customer acquisition strategy.
2. See which channels and tactics perform best
You can use the CAC formula above to compare acquisition costs for different marketing channels and reveal which ones yield the highest return on investment. For example, if you find it costs more to acquire a customer from paid advertising than it does via organic social media, you may decide to invest more in your social media strategy.
As you build out your data, you can also compare your CAC against your own internal benchmarks to see how the cost of customer acquisition has changed over time.
3. Help your budget and resources go further
With these insights, you can make data-driven decisions about how and where to spend your marketing budget for the greatest return on investment and share concrete data with stakeholders to get buy-in.
By focusing on the acquisition channels and marketing strategies you already know work best for your business, you can double down on your successes to attract even more paying customers. This helps you run more effective marketing campaigns and improve efficiency while reducing overall acquisition costs.
5 strategies to reduce your customer acquisition cost
1. Understand your customers
To acquire more right-fit customers, understanding your customer is the foundation for everything. The best and most important thing you can do to lower your CAC is research your customers to learn what they want, what they do, and how they feel—then use this real customer data to drive your decision-making and guide your customer acquisition strategy.
It’s also useful to understand the behaviors associated with both successful acquisition and customer retention, so you can work backward to replicate those wins. For example, does your research reveal that users who engage with content in their first 30 days are less likely to churn? Consider sharing more content during the acquisition stage to see if you can set them up for success even earlier.
💡 Pro tip: Hotjar has a number of tools that help you to understand, empathize with, and engage your prospects to turn them into customers, including:
📹 Recordings: watch playbacks of real people navigating your site to see exactly what they’re interested in, frustrated by, or having issues with. Filter your recordings by different segments—such as successful conversions or churning customers—to understand how different cohorts behave. Use these insights to create tailored campaigns and identify conversion blockers like bugs or UX issues that could impact acquisition.
✍️ Feedback: discover how users really feel with in-the-moment feedback, captured while people explore your site. Spot areas for improvement on key conversion pages, or prompt people to rate their experience on a scale from 1-5 to get a pulse check on the customer experience as it impacts acquisition.
💬 Surveys: hear directly from your users with on-site and external surveys. Ask prospects what they’re looking for or find out what existing customers love about your site or product, and leverage these insights in your next marketing campaign to attract more like-minded people. Bonus: make creating and launching surveys even easier by harnessing the power of AI. 🤖
🎤 User interviews: automate the entire user research process with Engage, which enables you to perform in-depth user research. Recruit people from your own network or Hotjar’s pool of 200,000+ participants to get valuable qualitative data from your target audience, and combine it with quantitative data to create a winning customer acquisition strategy that lowers costs.
Hotjar Recordings shows you how real users navigate your site, providing valuable insights that help you improve customer acquisition (and lower CAC)
Reduce your customer acquisition cost with Hotjar
Understand what makes people convert—and what stops them—so you can create more engaging campaigns and win more customers.
2. Optimize campaigns for your target audience
Once you have a clear picture of your ideal customer, use it to strategically focus your marketing efforts. “Make sure you only show your campaigns to your target audience,” says Andrew Davis, Director of Growth at Hotjar. “Don’t waste your budget showing ads to the wrong people.”
To do this, use segmentation to deliver the right messaging to the right audience, then draw on rich user behavior data to create a connected, cohesive customer journey. Create messaging or flows based on information such as user role, industry, or country to create even more targeted and engaging campaigns that really resonate with your target audience.
🔥 If you’re using Hotjar
Use the Hotjar + HubSpot integration to personalize your customer interactions even more. Bring behavior insights from Hotjar into HubSpot to segment marketing automations using more granular properties, trigger marketing flows based on user behavior, and empower your sales team with the context they need to close more deals.
3. Create simple conversion journeys
Improving your conversion rate using conversion rate optimization (CRO) tactics helps you turn a greater number of your hard-won visitors into customers, reducing your total customer acquisition cost. One quick way to do this? Make it super easy for people to convert.
The exact way you do this will depend on your business, but essentially you want to reduce customer effort and create a seamless conversion process. Here are three ways to get started:
For product-led growth, try reducing the number of steps in your sign-up or onboarding flows
For sales-led growth, try optimizing the demo request experience to improve pipeline conversion
For direct-to-consumer or ecommerce businesses, try enabling shoppers to check out without needing to create an account first
💡Pro tip: view session recordings to understand where and why people currently exit their journeys without converting. Filter to sessions with errors, u-turns, and rage clicks (i.e. repeated clicks on an element in a short amount of time that signify frustration) to quickly dig into potential issues.
4. Troubleshoot any blockers
Use funnel analysis to identify where users drop off in the customer journey. If you spot any leaks in your customer acquisition funnel, dive in to see what’s causing them.
Technical or UX issues are easy to miss but can significantly impact acquisition. Broken links or non-functioning buttons don’t just create a poor customer experience—they can even outright prevent conversions and negatively impact your CAC. For example:
We monitor our sales funnel to see where people abandon sign-up without converting, and one day we noticed a huge drop in conversions from our sign-up page. We discovered that the autocomplete feature was broken, so we fixed it, and conversions went back up immediately.
💡 Pro tip: use Hotjar Funnels to build and analyze a customer acquisition funnel so you can spot where and why users don’t convert. Quickly jump into the associated recordings to see exactly what your users saw and understand the behavior behind the drop-off—and identify what you need to do to fix it.
Use Hotjar Funnels to build and analyze your customer acquisition funnel to quickly spot drop-offs and conversions
5. Test and optimize
Customer acquisition is never one-and-done—and just because something works well doesn’t mean it couldn’t work even better.
Running experiments and regular A/B tests will reveal data-driven ways to improve the customer journey and optimize conversions. For example, does including social proof on your pricing page increase sign-ups? How about moving the call-to-action (CTA) button higher up your landing page?
By A/B testing different variants, you’ll find subtle but powerful ways to enhance your conversion rates, allowing you to get more bang for your customer acquisition buck.
🔥 If you’re using Hotjar
Combine Hotjar with your A/B testing tool of choice—like Unbounce or Optimizely—to understand not just which variant performs better, but why. View session recordings to see how users engage with different versions, and use Feedback or Surveys to get more specific user feedback on why they convert (or don’t).
Take the WTF out of reducing CAC with user behavior insights
By calculating and tracking your average customer acquisition cost, you’ll get valuable insights into the profitability of your business and make informed decisions that drive sustainable growth. And while attracting and converting the right users will always require an investment, comprehensive user research helps you reduce your customer acquisition cost while still growing your customer base.
Use behavior insights to make data-driven improvements to your customer acquisition process to make every user feel like a million dollars—without breaking the bank.
