How To Estimate CAC For Your Startup?

Are a founder building a financial model for your business? Or are you a marketer trying to calculate the budget for your marketing campaigns? In either cases, you will face a very important question: what is your customer acquisition cost (CAC)?

Whether you are running an established business or a startup, in this article we explain you how to estimate CAC for your startup.

What is CAC and how to calculate it?

CAC is a common metric for any business and has been around for a long time to assess a business’ sales & marketing efficiency. In short, CAC is the sum of all your acquisition costs (sales & marketing) divided by the number of new customers you acquired over a given period.

The expenses can be:

• Paid ads campaigns (search, display advertising, social media)
• Offline marketing campaigns
• SEO & content marketing expenses
• Sales team salaries and commissions
• Marketing team salaries

Let’s assume you are running a online clothing shop and you generated 3,000 sales from 2,400 customers over the past month. You spent the following in Sales & Marketing:

• Paid marketing campaigns: $55,000
• Content marketing expenses: $10,000
• Marketing team salaries: $20,000
• Sales team salaries and commissions: $0 (you do not acquire customers via sales people but marketing only)

Therefore, CAC is equal to $35 ($85,000 / 2,400). In other words, you spent in average $35 per customer over the past month.

Note: whilst the formula above isn’t wrong, it isn’t fully accurate either. In order to calculate accurately your CAC, see our article here.

What is CPA and how is it different vs. CAC?

Many public sources present average CPA per industry and/or per marketing channel. They do not present CAC though. Let’s address here why is that so, and why these are 2 very different metrics:

• CAC (Customer Acquisition Cost) measures the cost to acquire a customer

• CPA (Cost Per Acquisition) measures the cost to acquire something that is not yet a customer: it can be a signup, a trial or a lead (also commonly referred to as “Cost per Lead” or CPL)

The 2 are often mistaken for one another because CPA is usually used to measure the cost of certain things that are included within CAC. For more information, see Andrew Chen’s article on CAC here.

The simple reason why CAC by industry isn’t an easy to find publicly is because conversion rates (from leads to customers) aren’t available publicly.

What are CPA industry averages?

The figures presented below have been sourced from a 2018 market study which analysed the average Cost Per Acquisition (CPA) for 20 different industries, using the following formula:

The market study differentiates the 3 most important digital ads channels:

• Search (Google Ads)
• Display (Google Display Network)
• Social media (Facebook Ads)

Search & Display

Social Media

How to estimate CAC for your startup?

We have seen industry averages for CPA (Cost per Acquisition) for 3 paid marketing channels (search, social media and display). This is already a good proxy to estimate your CAC for your startup.

Indeed, whilst CAC doesn’t only include paid marketing expenses (refer to our formula above), it represents 62% of the total marketing budget of US companies nowadays.

Note: for a more accurate estimation of your CPA on search platform, use free keyword research tools such as Google Ads Keyword research tool or Ubersuggest to find information such as average click-through rate, keyword difficulty and cost-per-click.

In order to effectively assess your CAC from CPA, you will have to factor in all other Sales and Marketing expenses, using the following formula:

For instance, using the benchmark above, you estimate that converting a lead (CPA) might cost $100 in paid ads. Let’s assume only 20% of leads become customers and converting them cost another $500 (in sales people salaries). Therefore, whilst CPA is $100, CAC is $1,500 ($100 x 5 leads + $500).

Of course, the expenses you need to include within your CAC depends on the type of business you have. More importantly, it depends on your marketing funnel. For more information on how to identify the different steps in your marketing funnel and the expenses associated to it, see our article here.

The more detailed your funnel is (e.g. Enterprise SaaS), the more intricate it will be to assess your CAC. Especially if you do not have any historical performance nor metrics.

In comparison, a good example of a relatively straightforward marketing funnel is B2C ecommerce. Indeed, leads usually convert to customers without any other interaction nor spending than digital ads spending, SEO & content and marketing salaries.

Calculate your digital ads spending by looking at cost-per-click averages for your keywords (say $2.50), an assumption on conversion rate (say 1.5%) and CAC (excluding SEO & content and marketing salaries) is ~$166.