Customer acquisition cost (CAC) – an introduction
Customer acquisition cost (CAC) is a critical metric that reveals how much your business spends to acquire each new customer. Understanding CAC helps in optimising marketing strategies and improving profitability. In this comprehensive guide, we will delve into what CAC is, its significance, and provide a step-by-step approach to calculating it effectively.
What is customer acquisition cost (CAC)?
Customer acquisition cost (CAC) refers to the total expense incurred to acquire a new customer. This includes costs related to marketing, sales, and any other resources used to convince a consumer to purchase your product or service. Understanding CAC is essential for evaluating the efficiency of your marketing strategies and overall business health.
Why is customer acquisition cost (CAC) important?
Knowing your customer acquisition cost (CAC) is crucial for several reasons. It helps determine the effectiveness and profitability of your marketing efforts. A high CAC suggests that your customer acquisition strategies may be inefficient, leading to reduced profitability. Conversely, a low CAC indicates effective marketing and sales strategies. Monitoring and optimising CAC is vital for sustainable business growth and profitability.
How to calculate customer acquisition cost (CAC): A step-by-step guide
Calculating customer acquisition cost (CAC) involves a straightforward formula:
CAC = Total sales and marketing costs of new customers acquired / Number of new customers acquired
Follow these steps to calculate CAC accurately:
1. Sum up all marketing and sales expenses
Include costs like advertising, salaries of marketing and sales personnel, tools, and any other related expenses.
2. Determine the number of new customers acquired
Track the number of new customers over the same period.
3. Divide the total expenses by the number of new customers:
This gives you the average cost to acquire a single customer.
4. Worked example
Consider the below sales channels with sales and marketing spend per channel.
It's relatively clear that the most effective marketing channel for this company is web marketing with a CAC of £140.
Effective strategies to reduce customer acquisition cost (CAC)
Reducing customer acquisition cost (CAC) can significantly boost your profitability. Here are some effective strategies:
Improve conversion rates
Enhance your website’s user experience, use A/B testing, and optimise your sales funnel to convert more leads into customers. Improving conversion rates means more customers for the same marketing spend, thus reducing your CAC.
Increase average order value (AOV)
Encourage customers to spend more per transaction through upselling, cross-selling, and offering bundle deals. Increasing AOV helps to spread acquisition costs across higher revenue, effectively lowering your CAC.
Optimise marketing channels
Focus on high-performing channels and allocate your budget to those that yield the best return on investment (ROI). Regularly analyze the performance of each channel to ensure resources are used efficiently, reducing overall CAC.
Leverage referral programs
Encourage existing customers to refer new ones by offering incentives such as discounts, freebies, or loyalty points. Referral programs can bring in new customers at a lower cost compared to traditional marketing methods, thus reducing CAC.
Enhance customer retention
Retaining customers is often cheaper than acquiring new ones. Implement loyalty programs, provide excellent customer service, and engage with customers regularly to keep them coming back. High retention rates mean less frequent need for new customer acquisition, thus lowering CAC.
Additional considerations for CAC
The dynamics of CAC
Understanding the dynamics of CAC is crucial for businesses with fluctuating marketing costs or seasonal demand. Regularly monitoring these changes helps in adjusting strategies effectively.
A higher CAC isn't always a bad thing. There's a natural relationship between CAC and average order value (AOV) or subscription price and so a higher CAC may actually could be driven or drive higher revenue.
CAC and attribution
Attribution plays a vital role in accurately calculating CAC. Properly attributing sales to the correct marketing channels ensures that you have a clear picture of which efforts are driving customer acquisition.
In the above example it's assumed customers have been acquired either offline or online. However, in reality, attributing customer to a specific channel is much harder e.g. an offline customer may have seen your web marketing, signed up to your newsletter and had a number of other touch points before signing up at an event.
CAC and longer sales cycles
For businesses with longer sales cycles, it’s important to account for the time lag between marketing spend and customer acquisition. This can affect how CAC is calculated and interpreted.
Visual representation of CAC
What does CAC look like?
Conclusion
In conclusion, understanding and optimising your customer acquisition cost (CAC) is essential for the financial health of your business. By accurately calculating CAC and implementing strategies to reduce it, you can improve your marketing efficiency and boost profitability. Regularly monitor your CAC to adapt and refine your strategies, ensuring sustainable business growth.
