Your sales are up, but your profits aren’t — so where’s all the money going? If you’re wondering why your business isn’t generating much profit despite increasing sales, it’s important to understand that profitability isn’t just about boosting sales. To maximize profits, you need to run your business cost-efficiently. One of the most effective ways to measure your business’ performance is by actively tracking your customer acquisition cost (CAC) — also sometimes referred to as cost of customer acquisition (COCA) or cost per acquisition (CPA). 

Making CAC a key metric in your marketing and sales strategies can tell you things about your small business. It can help determine whether you should adjust your prices, whether your marketing strategies deliver a strong return on investment and if you’re overspending on your marketing strategy to gain new customers. If your CAC is too high, you should identify ways to reduce it.  

 To get the full picture, pair your CAC with other important business metrics, such as customer lifetime value (CLV), which is the total revenue a customer brings over the duration of your relationship; conversion rates, which is the percentage of leads you can turn into sales; and return on investment (ROI), which is the profit or loss you make on a specific investment in a marketing or sales strategy. Together, these metrics help you evaluate whether your marketing efforts are paying off and areas in which you can improve. 

What is Customer Acquisition Cost? 

Customer acquisition cost measures how much you spend to gain a new customer. It’s calculated by dividing your total sales and marketing costs by the number of new customers your small business gains over a given period. This simple ratio helps you understand the true cost of growth and whether your marketing spend is delivering real value. Some of these costs include: 

• Marketing tools. This includes the cost of any customer relationship management (CRM) software, email marketing platforms and contact lists of sales prospects you’ve purchased, as well as the total cost of any other marketing tools your business has acquired.  

• Website costs. Having a good website is crucial to your business, especially if it enables customers to purchase goods and services. At least part of your business’ website creation, design, and costs should be added to your marketing total. 

• Marketing and sales staff salaries. Calculate the total compensation paid to employees, including benefits, and don’t forget to add what you paid freelancers and contractors. 

• Advertising costs. Costs associated with posting ads in media and online, including Google Ads.  If you engage in marketing campaigns that are offline (radio, TV, billboards, tradeshows and conferences, etc.), then these costs should be included as well.  

• Sales Discounts. This is the amount of money you would have earned had you not offered promotional discounts on your products or services.  

• Blogging. Many small businesses consider blog posts as an integral part of their marketing efforts, as good articles make small business owners look like experts in their fields and can attract potential customers to the top of the sales funnel. The cost of hiring blog writers should be added to your marketing and sales costs. 

• Promotional materials. These costs can include printed materials, such as business cards, brochures, flyers, catalogs, banners and direct mail materials, as well as video production and graphic design work. Additionally, add the costs from referral and loyalty program discounts. 

Why CAC is a Key Business Metric 

Whether you run a small retail business, an accounting firm or a software company, understanding your CAC ratio is essential, as it lets you know how much you are spending to acquire each new customer or client.  

A low CAC ratio — for example, 1:1 — indicates that you’re spending as much to acquire a new customer as you’re earning from them, which signals weak profitability. On the other hand, if your CAC ratio is high — let’s say 3:1 — that means that for every dollar spent on acquiring a new customer, you are getting $3 in return. 

If your CAC ratio is too low, it’s time to rethink your marketing and sales expenses. You may need to reallocate your marketing dollars to adopt a more efficient approach to attract and convert new customer leads.  

Calculating your CAC ratio is also important for: 

Budgeting: Your CAC ratio serves as a crucial indicator of whether you are spending too much or too little on your marketing efforts. It helps ensure that your budget aligns with your customer acquisition goals. 

• Product or service pricing: Even if your marketing strategy appears to be working, a poor CAC ratio could indicate that you aren’t charging enough for your goods or services. Monitoring CAC can help identify the need to adjust pricing for sustainable profitability. 

• New product offerings: If you’ve launched a new product or service, the CAC ratio can easily tell you if your marketing strategy for that new product or service is working. This allows you to make timely adjustments to improve performance.  

• Customer lifetime value (CLV): The CAC ratio is important in relation to the customer lifetime value (CLV) calculation. CLV measures the total value a customer will bring to your business over time. It’s critical to your business that your CAC ratio is significantly smaller than your CLV, meaning that the amount that a customer will bring to your business over a lifetime exceeds the amount you spent to initially attract that customer to your business.  

5 Ways to Increase Your Customer Acquisition Cost Ratio 

The lower your CAC ratio, the less money you’re making from each sale. Conversely, the higher the CAC ratio, the more you’re making from each sale. Here are five tips to increase your business’ CAC ratio:
 

1. Use value-based pricing for your products and services: If your CAC ratio is low, one possible reason is that you’re not charging enough for your products or services. To address this, revisit your pricing strategy and research what consumers are actually willing to pay for your products or services. This is known as value-based pricing and can be done by examining what your competitors are charging and promoting the value of your product to potential customers. By determining how much you can charge for your products and services, you may be able to increase your prices to become more profitable.
2. Learn how to market on social media: Social media is one of the most powerful marketing tools for small businesses. Learning how to master platforms such as Facebook, Instagram and TikTok can lessen or even eliminate your need for an expensive marketing firm.
3. Cut what isn’t working: This may sound obvious, but if your CAC ratio is low, then take a close look at what is and isn’t working in your marketing strategy. If you use Google Ads, for example, and you notice the cost per click rate is high but isn’t being converted into a lot of sales, it may be time to rethink that strategy.
4. Consider using CRM software: If your CAC ratio is low and you’re not currently using a customer relationship manager (CRM), it may be time to invest in one. While CRM software can be expensive, it can be incredibly helpful in identifying your target audience and managing interactions with your customers across multiple channels. CRM software can also help eliminate redundancies in your sales process and make your sales funnel more efficient. If you want to start small, there are free CRM tools available online that still offer powerful features to help you get organized and grow.
5. Examine your sales team: If your small business has a sales team, consider boosting performance through financial incentives such as contests or increased bonuses. At the same time, be prepared to make tough decisions, including addressing underperformance, which may involve letting go of team members who aren’t meeting expectations.  

Continue Monitoring Your Customer Acquisition Cost Ratio 

Getting a handle on your CAC isn’t just about crunching numbers; it’s about making smarter decisions to help your business grow profitably. By understanding what CAC is, tracking it regularly and making the right tweaks to your pricing, marketing and sales strategies, you can start turning those numbers into real results and set your business up for long-term success.