Metrics are an essential aspect of measuring and evaluating the performance of a business. By tracking and analyzing them, businesses can gain valuable insights into their operations and make informed decisions.
One of these key metrics is Customer Acquisition Cost (CAC). Understanding CAC is crucial for businesses looking to optimize their marketing spend and maximize profitability.
If you don’t know how to calculate CAC, stay with us, as we'll tell about it today.
What is Customer Acquisition Cost?
Customer Acquisition Cost (CAC) is a popular metric used to measure the total cost incurred by a company to obtain a new customer. Thus, it’s the expense a company incurs to identify a potential customer and persuade them to make a purchase or perform another action.
On the surface, this indicator may seem insignificant in the process of developing a marketing campaign and planning a company's budget, but ultimately it’s insanely important.
And its calculation will give you a lot of insights that will help optimize your operations. ⭐
CAC works simply. It takes into account all expenditures related to marketing, advertising, and sales activities aimed at acquiring new customers over a certain period of time and then compares it with the number of customers it has managed to attract.
If the ratio is relatively low, great - you did a great job!
But, in a situation where the accurately calculated CAC turns out to be too high for a company's marketing efforts, appropriate steps should be taken to reduce its level, such as:
- marketing automation,
- automation of sales processes,
- testing new strategies and solutions (e.g., retargeting).
💡 Remember not to mistake CAC for CPA - meaning the cost per action. These two metrics are often confused with each other, whereas CPA is a billing model for online ads, where payment occurs when a user/customer performs a certain action, such as a click.
Why it's Important for Businesses to Calculate CAC
The answer to this question is simple:
It’s an important metric that can determine the profitability of their marketing and sales efforts. ❗
And at the same time, it’s one of the simplest metrics for testing the effectiveness of ongoing advertising campaigns.
Thanks to CAC, businesses can allocate their marketing budget more effectively as well. They can invest more in marketing channels that are more cost-effective and reduce spending on channels that are not generating a good ROI.
Also, businesses can identify areas where they can improve their sales and marketing efforts. For example, if CAC is increasing, it may be an indication that they need to improve customer targeting.
Overall, calculating CAC is crucial for businesses looking to optimize their marketing spend, improve profitability, and identify improvement areas.
How to Calculate CAC
So essentially, CAC measures how much a business has to spend on sales and marketing to gain a new customer. To calculate it, you need to identify some aspects: the total cost of all your marketing and sales efforts aimed at acquiring new customers and the total number of customers acquired during a specific period.
Here's the formula:
CAC = Total Cost of Sales and Marketing Efforts / Number of New Customers Acquired
To calculate CAC, follow these steps:
#1. Determine the time period for which you want to calculate CAC (e.g., a month, a quarter, a year).
#2. Calculate the total cost of all your sales and marketing efforts during that time period. This includes things like advertising spend, salaries and commissions for salespeople, and other related costs.
#3. Determine the number of new customers acquired during the same time period.
#4. Divide the total cost of sales and marketing by the number of new customers acquired to get the CAC.
💡 For example, let's say a business spent $10,000 on sales and marketing in a month and obtained 50 new customers during the same period. To calculate the CAC, divide the total cost of sales and marketing by the number of new customers:
CAC = $10,000 / 50 = $200
So, in this case, the CAC for the business is $200 per new customer acquired.
Factors that Affect CAC
There are several factors that can influence Customer Acquisition Costs for companies.
In order for this indicator to be completely reliable, all of a company's marketing efforts must be carefully analyzed. Understanding them can help companies optimize their efforts and, as a result, reduce CAC and improve profitability.
Some of the key factors that can change CAC are:
The marketing channels a company uses to attract new customers can significantly impact this metric. Different channels generate different costs and effectiveness, depending, of course, on the industry and target audience.
For example, social media ads and search engine optimization (SEO) may be more cost effective for a company targeting a younger audience, while traditional advertising methods such as television and print ads may work better for older demographics.
Therefore, it’s important for companies to track and evaluate the performance of each marketing channel to determine which ones generate the most leads and conversions.
Customer Lifetime Value
Customer Lifetime Value (CLV) is the total revenue a customer will generate for a company over the relationship. And the value a customer brings to a company over this time can significantly affect our ratio.
The way it works is that if a company can attract high-value customers, it may also be willing to invest more in marketing, or sales, to attract them.
Look at this example 👇
If a company works in the software business and has a software-as-a-service (SaaS) product, a customer who subscribes to the product and continues to renew the subscription every year will generate more revenue over time than a customer who subscribes for only one month.
Therefore, the cost of acquiring a long-term customer may be higher, but may ultimately be worth the investment because of the potential revenue it will generate over time.
In addition, companies can improve CLV by providing an exceptional customer experience. This can reduce CAC in the long run.
The churn rate refers to the rate at which customers leave a company. If a company has a high churn rate, it can significantly change CAC.
Why? Well, because the company will have to obtain new customers to replace those who leave constantly. And the cost of acquiring new prospects can be higher than retaining existing ones, which can increase CAC.
Look at this example 👇
If a company operates on a subscription-based model, and a significant number of customers cancel their subscriptions after a short period of time, the company will have to search for new clients to replace them. This can result in increased marketing and sales expenses, which directly leads to higher CAC.
As you can see, reducing the churn rate can actually affect CAC.
If companies focus on improving the customer experience and ensuring customer satisfaction, it’s possible that they will then reduce the need to spend on acquiring new ones.
In a highly competitive market, companies need to invest more in marketing and sales activities to stand out and obtain customers. This can increase CAC because companies have to spend more to succeed.
Look at this example 👇
If a business is in the fashion e-commerce industry, there may be many competitors offering similar products or services. In this case, companies may have to invest more in advertising, promotions, and other marketing materials to get customers.
To soften the impact of competition on CAC, companies can focus on differentiating their products or services, providing superior customer service, and building strong brand recognition. Then they are very likely to attract and retain customers without having to spend too much on marketing.
Best Practices for Reducing CAC
Knowing factors that can affect your CAC, here are 3 tips for businesses looking to reduce this metric.
🛒 Improve Customer Retention
Try to improve customer retention because, like we’ve said before, acquiring new customers can be more expensive than retaining existing ones. Therefore, provide excellent customer service, offer loyalty programs, and ensure value-added services.
✅ Optimize Marketing Channels
Also, bet on optimizing your marketing channels. This involves identifying the most cost-effective ones and investing more in them. For example, if a business finds that social advertising is more cost-effective than email marketing or promotion on tv, they can allocate more resources to social media.
🎯 Target the Right Audience
In addition, focus on targeting the right audience. Thanks to this solution, managers can improve the effectiveness of their marketing efforts. Therefore, identify their demographics, behaviors, and needs, and tailor marketing messages and strategies to resonate with them.
Solve Problems with Webinars and Virtual Events
To stay in touch with potential and new customers, as well as increase Customer Lifetime Value and reduce Customer Acquisition Costs, implement webinars into your marketing strategies to help you achieve the above goals.
Staying in touch with your customers is crucial, and what will better assist you in maintaining contact with your audience than webinars? This amazing solution helps you conduct various meetings remotely without location restrictions.
All you need is a device with wifi access and a little bit of time, and you can meet with the audience online and talk about any issue - present a new product, solve customer pain points, do a Q&A session - whatever you prefer.
Explore LiveWebinar, our webinar platform, create new marketing strategies and reduce the cost of customer acquisition in the long run. 💪
Customer Acquisition Cost is extremely important to your business. If you understand how it works and implement it in the life of your company, you will be able to optimize your marketing efforts and ultimately improve their effectiveness!
Don't forget about webinars that can help you reduce CAC. Check out our webinar platform and take advantage of its benefits.