Customer Acquisition Cost

In order to remain competitive and create a profitable business model, many companies choose to track and analyze data related to their marketing efforts. One of the most important metrics in digital marketing is the customer acquisition cost – or CAC for short.

There is some learning required in order to fully grasp the idea of customer acquisition cost tracking. That is why in this article, we will dive deeper into this topic, and help you understand what the customer acquisition cost is, how it is tracked, and why it’s important.

What is Customer Acquisition Cost (CAC)?

Customer acquisition cost (CAC) is the average amount of resources invested into marketing and sales in order to acquire each new customer.

Customer acquisiton cost is often analyzed together with the customer lifetime value (CLV) in order to paint a clearer picture of the company’s long-term ability to generate profit.

Neil Patel defines the customer acquisition cost as the cost of convincing a potential customer to buy a product or service.

By figuring out the cost of “convincing a customer to buy”, as Neil puts it, a company can be much more precise with their budget planning, as well as more aware of their profit margins.

How to Define Customer Acquisition Cost?

To better understand the CAC metric, it may be useful to visualize how companies look at their yearly marketing expenses. The following table provides all of the data required to calculate the customer acquisition cost for a particular year.

How to calculate CAC?

Marketing and Sales Expenses for X company

To calculate the average cost of acquisition for each customer, one needs simply to divide the total expenses for the year by the total number of customer acquisitions. In this case, the marketing expenses add up to 23000$ for the year, which is divided by the total number of 3300 customers equals a customer acquisition cost of slightly under 7$ per customer.

This formula may be applied more selectively to gain even more precise insights. For example, by categorizing expenses for the ad spend for each social media platform, or other paid channels, a more precise marketing strategy can be developed.

Why is Customer Acquisition Cost Important?

Acquisition of each new customer comes at a price, and this is a fact that all companies are aware of. Nevertheless, knowing exactly how the money will be allocated for the acquisition of each new customer, gives companies several strategic advantages.

Customer Acquisition Cost helps investors

CAC tells investors just how profitable a company is, helping them make better-educated decisions.

The difference between how much money can be gained from a customer, and the cost of gaining it, is in essence, the measure by which investors determine the profitability of a company. In order to deduce this, the CAC metric plays a crucial role.  

Customer Acquisition Cost (CAC) vs Customer Lifetime Value (CLV)

Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLV) are two sides of the same coin, but they are not the same metric.

While CAC lets us know how much each new customer costs, the CLV helps us calculate how much money can be made from each customer. Combined, these two metrics give a better overall view of the return on investment of a company.

What Are The Best Customer Acquisition Cost Strategies?

Strategies aimed at lowering your overall CAC while maintaining the same levels of revenue will vary depending on the type of business and marketing your company performs. Be that as it may, certain key principles can still be applied.

Add Value to your Offer

Whether it’s a product or a service, increasing the value of your offering by providing quality beyond your customers’ expectations is a surefire way to attract new customers, increase customer retention, and decrease the CAC for each new customer you acquire. A higher-quality offer will also help you get more value from your marketing.

One good way to figure out how to add value to your offer is to use surveys and customer reviews to determine exactly what your audience is looking for.

Make Conversion Easy

The conversion from a visitor to a lead or from a lead to a customer should be easy and straightforward. Make sure that you have optimized your website for a smooth user experience, both desktop and mobile version.

Use a CRM System

Using a CRM system can make tracking and planning your marketing activities much easier. A CRM system can then help you track your progress towards goals, how many customers you need to reach a certain profitability threshold, and much more!

Additional Tips & Tricks

• The LTV to CAC ratio is a metric that compares the customer lifetime value to the cost of acquiring a customer through marketing efforts such as Facebook ads, google ads, and other ways of targeting new customers
• Increasing the average order value can help bring the overall customer acquisition cost down
• Each marketing expense on every marketing channel should be tracked in order to have a clear idea for the yearly marketing spend, and subsequently, CAC
• More goods sold does not necessarily mean more profit. If the average customer acquisition cost is too high, the size of the customer base starts to lose value
• Focus on retention, because it is cheaper to retain an already existing customer, than acquire a new one

Now You Know What Customer Acquisition Cost is!

Customer Acquisition Cost, or CAC, is an important metric in marketing and business overall, as it allows companies to track their spending and calculate precise profit margins for each new customer. Combined with Customer lifetime value, this metric reveals the overall profitability of a company.

You learned what the customer acquisition cost is, why is it important, strategies for lowering customer acquisition costs and you’ve got a few tips & tricks in your pocket. With all this knowledge and information, it’s up to you now to determine if CAC tracking is the marketing approach you need to take for your company or organization.