Customer Acquisition Cost vs Return on Ad Spend

Customer Acquisition Cost (CAC) and Return on Ad Spend (ROAS) measure marketing effectiveness in fundamentally different ways. CAC calculates the total cost of acquiring a new customer, including all sales and marketing expenses divided by the number of new customers gained in a specific period. It provides a comprehensive view of customer acquisition efficiency across all channels and activities. ROAS, on the other hand, focuses specifically on advertising performance by measuring the revenue generated for every dollar spent on advertising. Expressed as a ratio or percentage, ROAS offers a more targeted assessment of ad campaign effectiveness without accounting for other marketing or sales costs.

A subscription software company should prioritize CAC when evaluating overall go-to-market strategy effectiveness or when comparing the efficiency of different sales channels (direct sales vs. partnerships). For example, if a company's CAC is increasing despite stable advertising performance, it might indicate growing inefficiencies in the sales process rather than marketing issues. Meanwhile, ROAS would be more appropriate when optimizing specific advertising campaigns or platforms. If a company is running simultaneous campaigns on Google, Facebook, and LinkedIn, comparing the ROAS of each helps determine which platform delivers the best return for additional investment, even while CAC remains the broader strategic metric for overall business health.

Customer Acquisition Cost

Return on Ad Spend

What is it?

Customer Acquisition Cost (CAC) is the cost a business incurs to acquire a new customer. This includes the fully loaded costs associated with sales and marketing to attract a potential customer and to convince them to purchase, divided across all new customers.

Return on Ad Spend (ROAS) is a marketing metric that quantifies the total revenue generated for every dollar spent on advertising. In other words, ROAS measures the effectiveness of your advertising efforts by comparing total ad spend on campaigns to the revenue from those campaigns.

Who is it for?

Chief Financial Officer

Chief Marketing Officer

Chief Revenue Officer

Accountant

Product Marketing Manager

Marketing Manager

Chief Financial Officer

Formula

ƒ Sum(Sales Costs + Marketing Costs) / Count(New Customers)

ƒ Sum(Revenue) / Sum(Advertising Spend)

Example

Say a company has the following breakdown of their sales and marketing expenses in one month: Sales and Marketing Salaries- $15,000 Travel Expenses- $500 Commission paid- $3000 Tech Stack-$500 Ads- $1000 In total, their sales and marketing efforts for the month are $20,000. Now, say for that month those efforts enabled the company to acquire 5 new customers. Dividing that total by 5 shows that the company spent $4,000 per new customer. Their CAC is then $4,000 for that period.

For example, Corey’s Cyclery spent $2,500 on advertising in the month of July through their PPC, Affiliate, and Display Campaign. The campaign resulted in $10,000 in revenue. Therefore, the July ROAS is equal to $10,000 / $2,500 or $4, which means that for every dollar spent the business generated $4 in revenue. This is equivalent to a return of 400%.

Published and updated dates

Date created: Oct 12, 2022

Latest update: Mar 21, 2024