Customer acquisition cost

The formula

Add up everything you spent to find and win new customers over a period, then divide by the number of new customers that period produced:

• CAC = sales and marketing spend ÷ new customers won

Use the same period for both numbers; a month or a quarter works for most service work. Count only customers hiring you for the first time. Repeat customers and warranty visits didn't cost you marketing to win, so counting them makes CAC look lower than it really is.

What counts as spend

Include every cost of getting work, not just ads:

• Advertising and lead fees: search and social ads, directory listings, pay-per-lead services.
• Printed and physical marketing: mailers, door hangers, yard signs and truck wraps. Spread something that keeps working for years, like a wrap, over the months it's on the road.
• Website and marketing help: hosting, an agency or freelancer, marketing software.
• Discounts and rewards: first-job coupons and referral gifts.
• Selling time: hours you or a salesperson spend on estimates, including the ones you lose, plus any commissions.

Leave out the cost of doing the work. Materials and labor on the job are job costs, not acquisition costs. Your spend figures come from your profit and loss statement, where marketing sits in overhead.

Example: In one quarter, a plumbing shop spends $4,500 on online ads, $1,000 on mailers and $500 on referral gift cards, $6,000 in all, and wins 40 new customers. CAC looks like $6,000 ÷ 40 = $150. But the owner also spent 30 hours running estimates. Valued at $50 an hour, that's $1,500 more, so the real CAC is $7,500 ÷ 40 = $187.50. The numbers are made up for illustration.

Track it by lead source

One average hides the channel that's losing money. Record where every lead came from and work out CAC for each source. When a channel charges per lead, its CAC is the cost per lead divided by your close rate on those leads. A cheap lead that rarely closes can turn into a very expensive customer.

Example: A roofer buys 40 leads at $75 each, $3,000 in all, and closes 4 of them: $750 per new customer. The same quarter, door hangers around active jobs cost $800 in printing and crew time and also bring in 4 roofs: $200 per new customer. Same number of jobs, but one channel costs nearly four times as much per customer. The numbers are made up for illustration.

Compare it with what a customer is worth

CAC means little on its own. Hold it up against the gross profit a new customer brings (see gross margin): first on the first job, then over the whole relationship, which is customer lifetime value. An acquisition cost that works for roof replacements could sink a drain-cleaning business, and a channel that loses money on the first job can still pay off if those customers keep coming back.

Common mistakes

• Counting repeat customers as new. It flatters the number and hides rising costs.
• Leaving out your own time. Owner hours spent quoting cost the business even though no bill shows them.
• Matching the wrong months. When customers take weeks or months to decide, as they often do on roofs and solar, this month's spend may win next quarter's jobs. Use a longer window for long sales cycles.
• Judging channels by cost per lead. What matters is the cost per customer won.
• Cutting a channel on CAC alone. Check the gross profit its customers bring before you drop it.

Lowering it without spending more

Every extra job you close from leads you already paid for lowers CAC without adding a dollar of spend. Answer calls quickly, follow up on every open quote (how to follow up on quotes has a cadence) and ask satisfied customers for referrals.