THE MEDIA ENCYCLOPEDIA
Customer Acquisition Cost
Customer Acquisition Cost (CAC) represent the total amount spent to acquire a new customer over a period of time.
What is Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) represents the total sales and marketing expenditures associated with the acquisition of a new customer over a period of time.
What is the formula for Customer Acquisition Cost (CAC)?
CAC = Total Sales and Marketing Expenditures (p1) / Total New Customers (p1)
What is an example of Customer Acquisition Cost (CAC)?
Customer Acquisition Costs (CAC) measures the effectiveness of marketing expenditures in relation to the acquisition of new customers.
The definition of a customer may depend on the business model.
For instance, in a SaaS business — where a customer is a new user — CAC is measured in relation to the acquisition of new subscribers and the expected Customer Lifetime Value (LTV) of said subscribers.
In the context of a gym, where a customer is a new member, CAC is measured in relation to the acquisition of new members.
In the context of a real estate brokerage — which relies on the sale and purchase or homes by its affiliated real estate agents — the recruiting and retention of real estate agents is key.
In this case, Customer Acquisition Cost (CAC) can be calculated by dividing the total expenses of the brokerage operation by the total amount of new real estate agents acquired in a specific period.
As an example, let’s say $30,000 was spent in a three-month period — inclusive of marketing costs, staff, office space, and more — with 3 new real estate agents acquired during the same period. This this example, CAC would be $10,000.
While a $10,000 expenditure to acquire a new customer — in this case, a real estate agent — may seem expensive, it’s worth comparing the CAC to LTV to see if and when the investment will pay off.
In the example below, we outline the basic building blocks to calculate CAC and LTV of a real estate agent. Notice the dynamics of a commission split are baked in to the equation.
Average Annual Real Estate Transactions — $5,000,000
Average Agent Sales Commission per Transaction — 3%
Gross Agent Sales Commission — $150,000 (5,000,000 * .03)
Average Brokerage Commission — 20%
Gross Brokerage Sales Rake — $30,000 (150,000 * .20)
Average Agent Tenure with Brokerage — 5 Years
Estimated Customer Lifetime Value — $150,000 (30,000 * 5)
Estimated Return on CAC — $140,000 (150,000 - 10,000)
In the example above, we assume each of the 3 new recently acquired real estate agents generates $5,000,000 in real estate transactions per year on average, with an average sales commission split of 80% (meaning the agent keeps 80% of each transaction and the brokerage keeps 20%).
In this scenario, each new real estate agent generates $30,000 in revenues for the brokerage, a 3x multiple on the initial Customer Acquisition Costs (CAC).
However, when we consider the LTV of an agent, we can see CAC of $10,000 is worthwhile.
There are a number of variables that effect CAC, including churn, or the rate at which a business loses customers relative to their total active customer base, and competition, which typically increases costs related to sales and marketing.