Calculating Customer Acquisition Cost: A Guide for Small Business Owners

Running a small business means making every dollar count, especially when it comes to marketing. But what happens when you spend $150 to land a customer who only brings in $100 in sales? It’s easy to lose track of these numbers, and that’s where calculating your customer acquisition cost (CAC) becomes essential.

In this guide, we’ll break down what CAC is, how to calculate it, and why it’s so important for your business’s profitability. If your CAC seems too high, don’t worry—we’ll also share actionable tips to help you bring it down.

What’s Customer Acquisition Cost (CAC)?

CAC is the total amount you spend to gain one customer. It includes all sales and marketing expenses that helped convert prospects into customers— the cost of organic SEO, paid ads, attending trade shows, etc.

CAC helps you check whether your marketing channels are bringing the results you want. It also helps you optimize the sales process and ensure your customer acquisition strategies are profitable to the bottom line. If you don’t track your CAC, you risk spending more money on acquiring customers that do not generate enough revenue to keep your business afloat.

How to Calculate Customer Acquisition Cost

Add every dollar you spent in acquiring a new customer within a specific period.

Divide that number BY the number of new customers who made purchases during that period.

In other words, the customer acquisition cost formula is:

• Total marketing spend: $2,000

Divided by

• New customers acquired: 50
• CAC = $40 per customer

This means for every newly acquired customer, you spend $40.

For accurate calculations:

• Only count new customers, not repeat purchases. New customers fall between the period of a specific marketing effort.
• Analyze marketing costs and first-time sales within the same period. 
• Calculate each marketing channel separately to find the channel that is most effective in converting visitors to customers.

What’s the Total Marketing Spend?

The total marketing spend is the total amount you invested in every marketing channel (all activities) that led to the sales you got. This includes

• Advertising (PPC, social media ads, print ads)
• Sales and marketing team salaries
• Payment to contractors
• Software subscriptions (CRM, email marketing, analytics)
• Content costs (blogs, videos, social media posts)
• Website maintenance and technical SEO costs
• Marketing agency fees (if any)
• Event marketing costs (if any)
• Sales team commissions (if any)

If you’re a relatively bigger business, you can also consider costs like:

• Training expenses for sales and marketing staff
• Marketing materials and branded items
• Customer service costs during the sales process
• Technology infrastructure for marketing operations

Calculate these expenses monthly or quarterly for accurate CAC and notice the cost trends. Know when you spent so much on CAC and when you spent less, and see how you can optimize your marketing activities to yield more productive results— lesser CAC.

Metrics to Use with CAC to Better Understand It

Your CAC doesn’t tell the whole story. You need to calculate metrics like customer lifetime value (CLV), gross margin, and return on ads spend (ROAS) to know if you’re making or losing money in your business:

1. Customer Lifetime Value (CLV)

Your CLV estimates how much revenue you can expect from a single customer throughout your business relationship with them. It considers that not all customers will stay forever; it then factors in your net profit from initial and repeat purchases and the average purchase value and frequency of purchases until they stop patronizing your business.

This helps you decide how much you can afford to spend on acquiring new customers. It also helps you

• Set appropriate marketing budgets
• Show if you need to focus on customer retention over customer acquisition
• Identify your most valuable customer segments
• Predict future revenue

The customer lifetime value formula is:

Average purchase value multiplied by average purchase rate multiplied by average customer lifespan = CLV

For context,

• The average purchase per customer is $50
• The average purchase frequency per year is 4
• Years as a customer: 2

CLV is $50 × 4 × 2 = $400

The CLV is $400.

What does this mean for your business? Analyze the customer lifetime value (CLV) to customer acquisition cost (CAC) ratio by dividing your CLV by your CAC.

CLV to CAC ratio = CLV ÷ CAC

For context, if the CLV is $400

And the CAC is $20

CLV to CAC Ratio is $400 ÷ $20 = 20:1

This means that when you get a customer for $20, the average customer will stay for 2 years and spend $400 with you, which is pretty good in this hypothetical scenario. The average customer stays for at least 1 to 5 years, depending on your niche and how satisfied they are with you. According to a KISSmetrics analysis, Starbucks customers stay for as long as 20 years.

To contextualize the CLV to CAC ratio:

• If the ratio is below 3:1, You spend too much acquiring customers. Cut acquisition costs or increase customer value through upsells and retention
• If the ratio is at 3:1 to 5:1: Your business has profitable margins
• If the ratio is above 5:1: You probably have more money and should invest more in other growth opportunities

2. Gross Margin

While CLV shows potential revenue, gross margin is your actual profit after subtracting the costs of the product or service sold. This helps you ensure that the CAC doesn’t eat into your profits. It also

• Shows the actual profit of each sale,
• Helps improve your pricing strategy
• Determines if you can afford current acquisition costs
• Identifies which products deserve more promotion/marketing spend

Use this formula to calculate your gross margin:

(Revenue – cost of goods sold) divided by revenue multiplied by 100 = gross margin percentage

For context:

• You sell a product for $1,000.
• Your cost to make it is $400.
• Gross margin is ($1,000 – $400) ÷ $1,000 × 100 = 60%

While the industry standards on gross margin vary, you can get as much as 36% profit margin or less.

If your margin is below 20%, keep CAC under 5% of customer revenue

If it’s 20-50%, CAC can be 5-15% of customer revenue

If it’s above 50%, CAC can be up to 20-25% of customer revenue

This means that if you sell products at a 40% margin, the product price is probably $100, the cost of goods is $60, and the gross margin is $40 (40%).

This also means that if your CAC is 15%, your profit after paying the marketing costs is $25 per product.

3. Return on Ad Spend (ROAS)

ROAS is the revenue generated for every dollar spent on advertising. It shows whether your advertising dollars generate enough sales. Unlike CAC, ROAS focuses on the efficacy of PPC ads. It helps you determine the ad strategy and platform that works best to avoid wasteful ad spending.

The formula to calculate your ROAS is:

Revenue from ad campaign divided by ad campaign cost

• This means that if your Facebook ads generate $10,000 in sales
• You spent $2,000 on those ads

ROAS = $10,000 ÷ $2,000 = 5x

What this means is that:

• ROAS below 2x: Your ads lose money
• 2x-4x: Your ads barely break even
• Above 4x: Your ads generate a healthy profit

Calculate these different metrics monthly or quarterly alongside CAC for a complete picture of your business revenue and growth potential. If you’ve calculated this metric and others and found that your CAC is too high, here’s how to reduce it.

How to Reduce Customer Acquisition Cost (CAC)

Reducing CAC helps you invest more money where it matters, and this can be marketing channels that are more productive than others. Follow these tips to reduce your CAC:

1. Improve Your On-page and Off-page Website SEO

SEO is an organic way to generate free, consistent traffic that converts to customers. However, you need to make intentional efforts to optimize your content, build backlink authority, and maintain your website’s technical health so users enjoy a smooth browsing experience.

Here are other things you can do, starting with technical SEO:

• Fix broken links using Google Search Console reports to avoid 404 errors
• Compress images to improve page load speed
• Create XML sitemaps for better search engine indexing
• Set up HTTPS security to encrypt their data and inspire trust
• Make your site mobile-responsive to make it accessible to readers and search engine bots

Tip: Read more on why technical SEO is important.

Optimize your on-page SEO by following these steps:

• Target keywords with clear buying intent
• Add meta descriptions to all pages
• Write descriptive URLs (example.com/blue-tennis-shoes)
• Include target keywords in H1 and H2 headers
• Refresh and update old content with new information

Tip: Read more on how to improve your on-page SEO.

Optimize local SEO with these activities:

• Claim and optimize GBP to rank for local searches
• List your business on relevant directories to improve your visibility on local listings
• Get customer reviews on Google to show trust signals to prospects
• Add location-specific pages if you serve multiple areas to target specific audiences at specific locations

Tip: Read more on how to dominate “near me” searches

If you do these, track metrics like

• Rankings for target keywords
• Organic traffic growth
• Conversion rates from organic visitors
• Organic traffic value versus paid traffic

SEO takes around 3-4 months (or more) to show results, but it helps reduce CAC in the long term, especially when done right.

2. Create Content That Converts Readers to Customers

Half of the challenge some businesses have is creating the wrong content, and this is because their content strategy is flawed.

The right content can help you reduce CAC because it attracts potential customers who are searching for solutions to their problems. When your content solves these problems, readers trust your expertise and are more likely to buy from you.

So, which type of content should you create? Consider these:

• How-to guides for common customer pain points
• Local area guides and recommendations
• Behind-the-scenes looks at your process to show how your product (or service process) is better than competitors’
• Customer success stories with real results (to show actual results from actual customers)
• Seasonal buying guides
• Expert advice in your industry (to improve authority and credibility)

You can also create extra pages for your products/services, depending on what it is. This is exactly part of our strategy for Brilliant Earth, and it led to a 21% increase in organic traffic, a 29% increase in total keywords ranking, and a 26% increase in total transactions.

The strategy was simple: we researched and developed a solid content strategy. We revamped their URL structure and, most importantly, created 300+ pages using faceted navigation so users can filter through their products. We also did other things for the business, but if you want to get started, you can start with these to avoid overwhelm:

1. List your customers’ top 10 questions
2. Write direct answers to each question
3. Include your product or service as one solution
4. Add photos of real results
5. End with clear next steps to contact you

Tip: read the following resources too:

• Buyer persona to know who your product is for
• Content strategy to develop a content strategy
• Website SEO tips to improve your SEO on Google.

3. Find and Focus on Your Most Effective Marketing Channels

The channels that lead to marketing success differ for every business. For some, it is SEO, word-of-mouth marketing, and local partnerships. And for some, it is local events and community engagements, or paid ads.

Whatever your most effective marketing channel is, focus on it. Here’s how to find the most effective channels for your business:

1. Check your website analytic tool for the traffic sources (to know where they come from)
2. Calculate the cost per customer from each source
3. Note which channels bring repeat customers
4. Calculate the average customer purchase by channel
5. Compare the channel CAC to customer lifetime value

When you have these results, choose the channels that have lower customer acquisition costs and focus on them.

4. Focus on Product Segments With Higher Customer Value

Every business has a category of customers who spend more, buy more often, and have more lifetime value than others. These are your high-value customers. Finding more customers like them will reduce your marketing costs because you’ll spend less money trying to attract people who are more likely to buy from you.

Now, you may ask, why are some customers more valuable? They’re more valuable because they:

• Know what they want from your business
• Buy regularly without needing promotions
• Trust your business enough to spend more
• Often tell others about your business
• Cost less to serve because they’re familiar with your products or services

So, how can you find these high-value customers? You can start by looking at your data for the past 3-6 months. Look for:

1. Frequent buyers

• Which type of customers shop more than once a month?
• What days and times do they usually buy?
• Which products or services do they purchase repeatedly?

2. Big spenders

• Which type of customers make large single purchases?
• Which customers never ask for discounts?
• Who buys your premium products or services?

3. Long-term customers

• Which type of customer has bought from you the longest?
• Which customers have never complained?
• Who regularly brings friends or family?

You can use the same metric for your service businesses. Now that you know who your best customers are, do the following:

1. Create customer profiles:

Write everything you know about these customers:

• Where they live or work
• When they usually buy
• What products they prefer
• How they found your business
• Why they keep coming back

2. Find similar customers:

Use the customer profile to find more customers like them:

• Advertise in locations where similar people spend time (Facebook communities, organic SEO, physical strategic places)
• Create services or products that match their needs
• Adjust your business hours to their schedules
• Price your offerings based on their buying habits

3. Make them feel special when they visit your store or buy from you online. You can keep them happy and satisfied by providing:

• Early access to new products
• Special booking privileges for your services
• Volume discounts
• Exclusive services
• Priority support

4. Finally, check if you’re making progress by calculating metrics like:

• How much does each customer spend?
• How often do they return?
• What makes them spend more?
• Which new customers match your best customer profile?

The goal of segmenting your customers based on their pocket value is to focus your marketing spend on finding more of your best customers. This approach will reduce your customer acquisition costs and help you build a stronger business.

Conclusion

Understanding and managing your Customer Acquisition Cost (CAC) is more than just a financial exercise—it’s a way to ensure your business thrives. By tracking your CAC alongside other key metrics like customer lifetime value and gross margin, you can make smarter decisions about where to allocate resources, which strategies to scale, and how to optimize your marketing efforts.

Improving your CAC isn’t a one-size-fits-all process, but with careful analysis and a commitment to refining your approach, you can attract more high-value customers while keeping costs under control. Remember, the goal isn’t just to acquire customers—it’s to build lasting relationships that drive profitability and growth.