What is Customer Acquisition Cost (CAC), How to Calculate It, Reduce it and Improve it
As a business, it costs money to gain clientele. Between paying for staff, advertising efforts, and marketing, these factors all play into the customer acquisition cost metric or CAC.
In the past, business owners and companies would use broad marketing tactics to try and reach as many people as possible, hoping it would result in sales. Now, with the level of data they have access to, advertisers can create highly specific and targeted ads that are more likely to create sales and increase awareness.
We can also track the entire relationship with customers, from those who might be interested in services and products to those who have become loyal patrons. So, what is considered CAC, how do you calculate it, reduce it and improve it?
There are many factors that play into customer acquisition costs. These include:
The customer acquisition costs metrics are most important to companies and their investors. Those looking to invest in start-ups will want to know this information, as it’s telling for the company’s scalability. It can also be an early indicator of profitability.
The divisions in companies that are typically concerned with customer acquisition costs are marketing and operations. CAC can help guide the marketing team to streamline their advertising efforts, see which strategies are working the best, and the return on investment.
Reducing customer acquisition costs can help boost the bottom line, improve profits, and allow the company to grow by reinvesting in other things. Suppose your clients take a considerable amount of money to attract. In that case, it could be challenging to run a successful business if their lifetime value doesn’t allow you to break even. Investors are more concerned with the relationships that companies currently have versus ones that could potentially arise in the future. They want to know about the current metric and not its potential.
To calculate how much it costs to gain a client, take all the existing expenses for marketing and divide them by the number of new clients during that time. It’s relatively simple to calculate during the marketing and advertising campaigns.
For example, suppose your company spent $1,000 in June on Facebook advertising. During that time, the company saw ten new clients. The customer acquisition cost during the campaign would be $100. However, there are some things to consider when calculating CAC. Suppose your company has made significant investments in, say, a new website or SEO. In that case, these play into the CAC, but they may not be as apparent as direct advertising dollars.
Unless CAC is diligently tracked, reducing your customer acquisition costs can be a challenge and require a lot of trial and error. First and foremost, correctly calculating and knowing your customer acquisition costs is the first step in finding ways to reduce them.
Ensuring you have effective marketing strategies is one of the best ways to reduce CAC. The less money you have to spend selling your company to customers, the better. Re-targeting ads through Google is another great way to reduce CAC. Opting in to re-targeting ads means that your company will be top of mind for potential customers who have already clicked on your ads.
Utilizing A/B testing, optimizing your sales funnel, and using automation where you can are all techniques that help your sales process move seamlessly, which should improve your sales rates.
Another way to reduce CAC is to improve your relationship with your clients, resulting in their lifetime value growing. It’s typically more expensive to gain a new client than it is to keep a current client spending money with your business. If you find that your customers aren’t sticking around long, you may want to determine why that could be.
When looking to improve your company’s CAC, there are always areas that can be improved upon. Advertising campaigns can continuously be revised to be more effective, customers can always be upsold, which increases their value, and the customer experience can always be better.
One of the best ways to improve CAC is by improving conversion rates. Using an online avenue for advertising, like Google and Facebook, will allow you to see your analytics for each ad. Taking the data to improve your strategies, landing pages, site optimization, site speed, and reduce your abandonment rates are crucial to improving your marketing efforts.
When the customer’s expectations of a functional and fast site are met, the bare minimum has been achieved. Suppose you can offer the customer something valuable that allows them to feel like your company cares about their experience or helps nudge them to want more value. In that case, it can help improve conversion rates. Typically, the satisfaction your customer feels towards your brand will help retain them.
If your company isn’t using a CRM, it’s time to start. A CRM is a customer relationship management software that helps your organization track clients, send out automated emails like newsletters and blogs, and can help manage your loyalty programs.
Customer acquisition costs should be broken down among each marketing channel that your company uses to see where marketing efforts are the most effective. For example, your company may have a large and engaged audience on Facebook, but not so much on LinkedIn. It likely means that potential clients on LinkedIn will have a higher CAC than those on Facebook, so increasing spend on Facebook should result in more clients.
Organizing this information into a spreadsheet with data like how much your ad spend was on Facebook, Google, how much each PPC was, how much you paid for SEO etc. Analyzing the data on each channel can help you adjust your marketing efforts. If your company is spending money on a platform that provides no return, you wouldn’t know that without tracking the data.
However, it’s much easier for some companies to track than others. For e-commerce businesses, it can be easily tracked which ads customers click in from. There are additional tools you can subscribe to that will tell you the actions of your paying customers, if they came from an organic search result, and much more.
Customer acquisition costs are essential to the profitability of a company. Minimizing how much money it costs to obtain new clients and maximizing how much they spend with you can be an excellent indicator of the future success of your business.
Easily calculate customer acquisition costs by adding up all the marketing, advertising, overhead, wages, and inventory costs, and divide it by the number of new clients that resulted from that particular marketing campaign.
Reducing your CAC can be done by improving the effectiveness of your marketing and advertising efforts, improving your retention rates, and ensuring your customer finds value in working with you. Improving your CAC involves increasing your conversion rates, ensuring a seamless sales funnel, and nurturing the relationship you have with your clients.