For every company, it is tempting to get new customers on board — no matter how much cost, time, and energy you need to invest.
But, keeping a tab on customer acquisition cost (CAC) helps you manage your marketing budget and make your business profitable.
This is a crucial marketing metric that lets you understand your expenses and ROI. If you are not monitoring your CAC, it is time to do it right now.
What Is Customer Acquisition Cost?
“Customer Acquisition Cost,” or CAC, means the total cost of getting a customer to buy your product or service. It includes the money spent on promotion, brand awareness, content creation, and support. CAC is also called CPA — Cost per Acquisition.
With CAC, you can understand how difficult it is to get a customer in the present market scenario. If it is lower, it means a lower cost for each new customer.
Besides, the customer acquisition cost is the standard for measuring the success of marketing campaigns. CAC lets you know which marketing and sales avenues efficiently bring in customers.
Why Customer Acquisition Cost Is an Important Metric
CAC is a metric that lets you gauge the performance of your marketing and sales campaigns. Every sales and marketing team invests a lot of money, time, effort, and resources to rope in new customers. CAC is just a vital performance business metric to determine effectiveness.
When you understand the cost of acquiring a new customer, you can start to create a strategy to reduce those costs. This will ultimately boost your ROI.
Calculate Customer Acquisition Rate
Choose the Calculation Time Frame
To calculate CAC, your first step should be determining the evaluation time period (month, quarter, bi-year, year). Thus, you can narrow down your data scope.
Perform the Calculation
Now, use the following formula to calculate your customer acquisition cost.
CAC= Marketing and sales expenses/The number of new customers.
While getting the data on expense and new customer count, you need to stick to the time frame determined in the first stage. If your time frame is six months, you need to use the cost and new customers of the last six months.
For example, if your company spent $5000 in the last three months to successfully onboard ten new customers, your CAC will be $5000/10=$500.
Compare CAC With Other Metrics
Getting the results alone will not bring any benefit. After the CAC calculation, you need to compare it against other valuable business metrics. Thus you can get meaningful insights into your business campaigns.
Factors That Affect CAC
Depending on the company and the industry, different things contribute to the customer acquisition cost. Having said that, the following factors contribute to the CAC of each company.
A company starting its business recently will have more CAC than a reputed company. The reason is the new companies need to spend more on brand awareness. Also, if your organization belongs to a competitive industry, it needs to spend more to get new customers.
Ad Campaign Expense
Today, the biggest portion of marketing costs goes into online advertisements, such as Google ads and Facebook ads. It is often the most direct cost for reaching new customers, so the more you spend on ads, the more CAC you need to bear.
Companies often ignore this factor, but the money you pay to your marketing and sales team should be considered while calculating the customer acquisition cost.
Content creation and publication are not free of cost. Depending on the money you spend on producing your content, your customer acquisition cost will increase or decrease. So, companies should also track these expenses to get an accurate CAC.
Technical and Maintenance Costs
Marketers often use different paid tools for running campaigns. While looking at campaign CAC, you must consider software purchases and maintenance costs.
Optimize Customer Acquisition Cost
Reducing CAC is not a difficult task. It is always possible to extract more value from the customers through effective advertising campaigns and improved customer loyalty. In this section, let’s find out how to improve CAC in all industries:
Improve On-Site Conversion Metrics
Focusing on your on-site conversion triggers is a great way to improve CAC. You can make a landing page with CTA, optimize the website for mobile, and increase site speed to improve website performance.
Also, do not forget to perform A/B split testing to lower the shopping cart abandonment rate and set up goals on Google Analytics.
Offer More Value
To attract customers, adding features similar to your competitors is not enough. Since the value of your products is subjective, you need to understand what can make your customers buy your products. Using customer support feedback or surveys, you can find out what they want from your company and add those to your service.
Use the Customer Relationship Management Tool
Nowadays, all companies use CRM applications to manage their process. This tool for your company will help you have a cloud-based sales tracking system where you can get a complete picture of your sales and marketing performance. It will help you make modifications in the necessary areas.
Deploy Customer Referral Program
Do you think the campaigns cost you a lot to get a new customer? Then it is time to introduce a referral program. Ask your customer base to refer new leads. If the reference helps you get new subscribers or customers, the referee will get some benefits. Make sure the referral benefits are less than your regular CAC.
What Is Customer Lifetime Value (CLV) and Its Relationship With CAC
Customer lifetime value (CLV) estimates the total income a business might receive from a typical customer from the tenure of clientship. It is also referred to as LTV in different scenarios.
The formula to calculate CLV is:
CLV = Average Transaction Size x Number of Transactions x Customer Retention Period
To measure the CLV, you need to consider the total revenue a customer generates and the total average profit you get from them. These insights will show how customers interact with your business and how effective your marketing strategy is.
To get an in-depth look into your company’s CLV, you might want to segment the customers. By finding out what works well with high-value customers, you can try the same strategy for your entire customer base.
Both CAC and CLV are connected, and businesses need to have a clear idea about their relationship. While CAC focuses on cost, CLV denotes customer value. The intertwined analysis can provide an overview of business success.
To accomplish this, you should study a metric called CLV to CAC ratio. This metric lets you see the complete value of a customer against the cost of acquiring them.
A ratio of less than one means you are spending more money to acquire a customer than the revenue they are generating. The ratio should be above one to signify revenue, but there might not be any profit. So, a ratio of 3 and above is ideal for any company.
What Is a Good LTV to CAC ratio?
LTV stands for lifetime value to a customer. Its ratio to the CAC lets you know how much you spend to acquire a customer. It also tells you whether you are overspending or not spending enough.
The standard LTV to CAC ratio is 3:1 or better. If it is 4:1 or higher, this means you have a great business model. A 1:1 ratio means the more you sell, the more money you lose. However, if the ratio is 5:1 or more, you might consider spending less on marketing.
Customer acquisition cost is a measurable metric due to trackable online ad campaigns and internet-based communications.
Every company must measure its CAC and aim for cost reduction to achieve better ROI. For that, you can consider this article to be a reliable guide.
You might also want to learn about different types of advertisements to find out the ideal type for less CAC.