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Many businesses strive to attract and retain customers in a fiercely competitive market. If care is not taken, the costs of their marketing and sales efforts could be greater than the number of customers acquired, impeding the business’ growth.
Here is why you should understand how to track customer acquisition cost (CAC). In this article, you will learn what CAC means, how to calculate it, and various ways to reduce CAC for your business. Let’s get started.
Customer Acquisition Cost (CAC) refers to a company's overall marketing and sales cost to get a new customer.
Think of it like this. You own a lemonade stand and spend money on employees, ads, tools, and gifts to attract potential customers. Then, someone comes to your stand and buys lemonade!
The overall resources (employees, ads, tools, gifts) it takes to acquire the new customer is CAC. It’s an essential metric that measures your investments and lets you determine whether you’re making the right decision for your business growth.
Customer Acquisition Cost (CAC) includes a wide range of expenses such as:
When calculating CAC, ensure you include all relevant expenses to get an accurate picture of your CAC. Calculating helps you understand your investments in sales and marketing efforts.
That said, the CAC formula is simple. All you need to do is divide the total cost of your marketing and sales efforts by the number of customers acquired.
In other words:
Customer Acquisition Cost = Cost of Sales and Marketing / Number of New Customers Acquired
For example, let's say your company spends $500,000 on sales and $300,000 on marketing. And your company generated 800 new customers during the last fiscal quarter.
Hence, if you were to calculate the CAC for your business, your CAC for that quarter would be ($500,000 + $300,000)/800 = $1,000.
However, having a good customer acquisition cost is crucial to any business’ growth. The key to profitability is ensuring your CAC is lower than the customer lifetime value (CLV).
The CLV represents the total revenue a customer is expected to generate for your business over their lifetime. It considers the initial purchase, repeat purchases, and potential referrals or upsells.
The CLV is calculated by multiplying the average purchase value by your purchase frequency. In other words:
CLV= (average purchase) × (purchase frequency)
By understanding the relationship between the two metrics, you can make informed decisions to optimize your customer acquisition strategy, maximize revenue, and drive revenue growth.
Reducing CAC is an ongoing process that requires continuous optimization and improvement. That said, here are some strategies to reduce customer acquisition costs (CAC).
Identifying your ideal customers prevents you from targeting the wrong people who could have little to zero impact on your sales and marketing efforts. This is why you need to identify who your customers are.
Identifying your ideal customers enables you to allocate resources to the right people and reach out to them. Plus, you would create hyper-personalized campaigns that address their specific needs and solve their pain points. This enables you to get the most return out of your marketing efforts.
Your website is another powerful tool that can improve or reduce conversion rates. If your website is confusing or your call to action isn’t bold and clear enough, your web visitors will leave your site and opt for your competitors.
On the other hand, if your website is well-optimized, it can generate qualified leads which can eventually convert. The average web conversion rate across all industries is 2.35%.
But you can increase this number with a well-optimized and functioning website. Here are some general web optimization guidelines you can consider:
If your business goal is to attract qualified leads, reduce CAC, and boost conversions, you need high-quality content that resonates with your audience. High-quality, relevant content addresses your prospect’s needs, develops trust, and builds a relationship with them.
It also highlights your business’ strengths and establishes you as an authority in your industry. With lots of valuable content for each stage of the sales funnel, you will capture your web visitor’s attention and persuade them to convert.
Here are a few guidelines to create an engaging content and reduce CAC:
Every business shouldn’t assume they have wasted resources on leads that didn’t convert. Retargeting your potential customers is a helpful strategy that enables you to stay on the radar of those who have previously interacted with your brand.
After all, customers may not complete the checkout process for your product or service. Or they may forget to subscribe to your newsletter. A gentle nudge can encourage them to complete the actions they left behind.
Retargeting is a way for businesses to persuade and reconvince their customers about the values they offer. On average, it can increase conversions by 150%. For effective retargeting, gather lots of data about your prospect’s behaviors, preferences, interests, and more. With this information, you can easily retarget them and convince them to buy from you.
As a marketer, it’s essential you run an A/B test on your landing pages and other aspects of your marketing campaigns. A/B testing enables you to identify what your customers want to experience. It can also show you what marketing strategies work best.
For instance, you may want to A/B test your landing pages’ elements such as the layout, buttons, forms, and more. Identifying what works best for your customers leads to a positive user experience (UX) on your website, increasing customer satisfaction and the likelihood of buying from you.
While you’re running A/B testing on your website, ensure you slowly roll out the changes. You don’t want to confuse your existing and prospective customers with too many changes which could lead to poor conversions. Instead, you want to monitor the campaign’s performance, identify the problems, and implement solutions that maximize your marketing efforts.
Here are a few reasons why you need to calculate CAC for your business.
CAC serves as a useful benchmark for evaluating the performance of your marketing efforts. A lower CAC often indicates that your business acquires new customers at a cost-effective rate. On the other hand, a high CAC shows you need to make new adjustments to your marketing strategies.
CAC enables you to determine the return on investment (ROI) of your marketing and sales efforts. By analyzing the ROI, you will be able to figure out the inexpensive channels that yield the most results and focus your marketing activities there.
For instance, let’s say your business utilizes channels such as social media, broadcast media, and print media to acquire new customers.
In the example above, you can see that social media is the only channel that generates the most qualified leads at a reduced cost when compared to other channels such as broadcast or print media.
As a business owner, you may want to tailor your efforts on social media to bring you more customers at a reduced cost. This insight brought by CAC is effective for your business in getting new customers and maximizing your ROI.
CAC is vital in assessing whether a business is profitable or not. By comparing CAC to CLV, you can determine whether your marketing efforts are profitable and sustainable in the long run.
For instance, based on the example in the table above, it’s easy for any business owner to determine that print and broadcast media may not be sustainable and profitable in the long run. Hence, they can focus more on social media which brings more customers at a reduced price.
Every business needs to determine whether customer acquisition cost (CAC) is sustainable for its growth. If your CAC is high, perhaps it’s time to change your marketing strategies with TripleDart.
Our B2B lead generation agency runs your marketing campaigns so that you can achieve your desired growth curve at a reduced rate. Our marketing experts implement effective B2B inbound marketing strategies that attract qualified customers and drive revenue for your business. Book a consultation call with us today.
CAC is the cost of convincing a potential customer to buy a product or service. It includes everything you do to attract a new customer, like your advertising strategies, employees, the technologies you employ, materials, and more.
You can calculate your CAC by dividing the total cost of your marketing and sales efforts by the number of customers acquired.
There are various ways by which you can reduce CAC. Some effective strategies you can implement include defining your target customers, optimizing your website, retargeting your customers, and creating engaging content.
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