Customer acquisition cost

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Customer Acquisition Cost is the cost associated in convincing a customer to buy a product/service. This cost is incurred by the organization to convince a potential customer. This cost is inclusive of the product cost as well as the cost involved in research, marketing, and accessibility costs. This is an important business metric. It plays a major role in calculating the value of the customer to the company and the resulting return on investment (ROI) of acquisition. The calculation of customer valuation helps a company decide how much of its resources can be profitably spent on a particular customer. In general terms, it helps to decide the worth of the customer to the company.

Customer Acquisition Cost (abbreviated to CAC) refers to the resources that a business must allocate (financial or otherwise) in order to acquire an additional customers.

Numerically, customer acquisition cost is typically expressed as a ratio — dividing the sum total of CAC by the number of additional patrons acquired by the business as a result of the customer acquisition strategy.

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Customer Acquisition Cost will typically increase as a business matures. It is also typical to see a diminishing return on CAC as a business grows in size and possibly geographical distribution. At some point, a given customer acquisition strategy will no longer be beneficial - this means that the financial rate of return that can be expected to accompany new customers is surpassed by the cost of acquiring those customers in the first place. Most businesses wisely choose to adopt a different strategy for customer acquisition, before this point is reached.

Customer acquisition cost can be used in conjunction with SaaS, B2B software sales and startups. The metric is mentioned in the publications of venture capital firms such as Accel Partners, Bessemer Venture Partners or Matrix Partners. The CAC ratio also appears in business oriented magazines such as Forbes and Inc.com.

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