Customer acquisition cost (CAC) is a critical indicator for businesses looking to grow their revenue. This metric helps companies understand how much money is spent on each new customer over a given period of time.
The term “customer acquisition costs” refers to the entire process of acquiring a new customer. Which includes building awareness of the brand, getting leads, qualifying those leads, converting the leads into prospects, closing deals, and retaining customers.
The goal of this metric is to measure the value of each dollar spent on acquiring a new customer, and hence the return on investment (ROI). Additionally, the CAC metric is frequently used in conjunction with customer lifetime value (CLV) to assess the value provided by a client.
Customer acquisition costs are often overlooked, but it is important to understand how much money a business is investing in marketing costs, sales expenses, and even customer success when acquiring and retaining clients.
There are many reasons why measuring the cost of acquisition of a customer is important. Below are a few of the most essential benefits:
The term CAC refers to the total amount of money spent on marketing, sales, and other activities that are intended to attract new customers.
This may include things like discounts, free trials, referral bonuses, etc., so it is not always the same as the cost you pay for an advertisement or a piece of content, for example.
Moreover, the cost of customer acquisition can also include any fees charged by third-party vendors who help with the sale.
Check the list below to ensure you are taking into account the most crucial costs associated with acquiring customers.
Calculating customer acquisition costs can be tricky because there are many variables involved. The following are some examples of what you should consider when calculating your CAC:
Once we have all the data in place, the CAC can be calculated by simply dividing all of the costs spent on acquiring new customers (marketing expenses and cost of sales) by the number of customers that were acquired during the period the money was spent.
However, there are several limitations to using this metric, despite it being a crucial indicator for measuring the success of acquisition efforts.
First, a company may make marketing efforts that do not yield immediate results. For example, a company may invest heavily into SEO but they may not necessarily start to see real returns until six months down the road. In this case, you may want to use a different calculation method.
Second, a company may have invested in sales and marketing tactics that don’t directly lead to acquisition. For example, a salesperson might spend a lot of time networking with prospects, but never actually close a deal. These types of activities often go unrewarded and therefore aren’t included in the overall cost of acquiring a customer.
Third, companies may choose to ignore certain costs associated with their acquisition process. For example, a large enterprise may decide to outsource its lead generation efforts, which would reduce the amount of time spent generating leads. This could result in a lower CAC since less time is spent on generating leads. However, this same company may also decide to hire additional salespeople, which will increase the total cost of acquiring a customer, even though they didn’t spend any extra money on lead generation.
Fourth, a company may choose to measure CAC differently than how we described above. For example, a business may report CAC based on the average revenue per customer over a given time period. This type of measurement is useful for comparing one company against another, but it does not provide us with information about whether or not the company has been successful at acquiring potential customers.
The bottom line is that measuring CAC is only part of the equation. It provides us with valuable insight into the effectiveness of our acquisition strategy, but it doesn’t tell us everything we need to know. To truly understand if we are making progress toward our goals, we must look beyond just the numbers.
The most expensive part of any business is getting new customers.
So how do you keep your CAC low? There are many ways to achieve this goal. Some companies focus solely on reducing their CAC. Others focus on optimizing their profit margins. Still, others work to improve their churn rates — the percentage of customers who stop paying for their subscriptions. And some companies try to increase lifetime value and revenue per customer.
While each approach has merit, here are four things every business should consider doing to lower its CAC: