Customer Acquisition Cost

Why Customer Acquisition Cost (CAC) is an Important Marketing Metric & How To Reduce It

CAC stands for Customer Acquisition Cost, which is one of the most important universal marketing metrics. In fact, CAC is crucial in determining the success of your marketing and sales campaigns.

So whether you’re trying to work out how efficient your sales and marketing strategies are, or to determine how profitable your customer base is, it’s vital to keep a pulse on the health of your business. Thankfully, there’s a performance metric that does both.

Everything you need to know about customer acquisition cost (CAC):

What is Customer Acquisition Cost (CAC)?

Customer Acquisition Cost is the amount of money it takes to win a new customer. Another way to put it would be that CAC is the amount of money you need to spend in order to have someone purchase your product or service. 

With CAC, any company can determine how much they’re spending on acquiring each customer.

Customer acquisition cost is an important economic unit, or KPI (key performance indicator). And CAC is often related to, or even confused with another important marketing metric called Customer Lifetime Value, also referred to as either CLV or LTV.

So, let’s start with the most commonly asked CAC question: How do you calculate customer acquisition cost? 

Calculating CAC should be relatively easy for your average SaaS company, but can be a bit more complicated for a retail store.

And you’re about to find out why.

How to Calculate Customer Acquisition Cost (CAC)

What’s included in customer acquisition costs? 

Well, for most B2B SaaS businesses, for example the costs of acquiring a new customer are determined by two factors:

  1. The costs of generating a lead.
  2. The costs of converting that lead into a customer.

Typically, the easiest way to arrive at the cost of securing a new customer is to combine the total sales and marketing expenses in a given time period (period t), and divide it by the total number of new customers. Consider that working with a B2B SaaS content marketing agency can help achieve desired results more professionally and effectively when it comes to content marketing.

What is the customer acquisition cost (CAC) formula?

Great, we’ve spelled out how to calculate CAC. However, when making calculations, most people want a simple mathematical equation, right?

Customer acquisition cost formula: 

CAC(t) = Total Sales & Marketing Costs(t) / # New Customers(t) 

So, let’s say a company spent $500 on marketing and $500 on sales over the course of a month. And in that same month, they acquired 50 new customers. In this case, their CAC would be $20.

($500 + $500) / 50 = $20

Why is Customer Acquisition Cost (CAC) Important?

So why is CAC important to your business? As I’m sure you’ve already realized, if your cost to acquire a new customer outweighs the average revenue generated per customer, you have a problem. Because by definition, that means you’re spending more money than you’re making.

Knowing your company’s exact CAC figures is extremely important, because you need to ensure that you and your sales teams are generating sufficient income to cover the costs of running the business.

What is a Good Customer Acquisition Cost (CAC)?

The best way to determine whether or not you have a good customer acquisition cost is two fold:

  1. Factor in CLTV (customer lifetime value) and compare it to your CAC.
  2. See how you stack up against the competition in your industry

Businesses use an CLTV to CAC ratio (CLTV:CAC) to guide spending habits for marketing, sales, and customer service.

LTV:CAC shows a brief snapshot of how much customers are worth compared to how much the business is spending to attain them.

Companies should aim to find the right balance for this ratio to ensure they’re getting the most out of their financial investments. Ideally, it should take roughly one year to recoup the cost of customer acquisition, and your LTV:CAC should be 3:1 — in other words, the value of your customers should be three times the cost of acquiring them.

If it’s closer to 1:1 that means you’re spending just as much money on attaining customers as they’re spending on your products. If it’s higher than 3:1, like 5:1 for example, that means you’re not spending enough on sales and marketing and could be missing out on opportunities to attract new leads.

At this point, you may be wondering what a good CAC looks like? Well, that may vary depending on your industry. To give your team a better idea of what to strive for, the next section breaks down average customer acquisition costs for different industries.

What is the average customer acquisition cost by industry?

Knowing whether or not you have a good CAC is much easier if you compare it to others in your industry. Here are some customer acquisition benchmarks for many of the largest industries, according to Propeller.

  • Technology (Software): $395
  • Telecom: $315
  • Banking/Insurance: $303
  • Real Estate: $213
  • Technology (Hardware): $182
  • Financial: $175
  • Marketing Agency: $141
  • Transportation: $98
  • Manufacturing: $83
  • Consumer Goods: $22
  • Retail: $10
  • Travel: $7

How to Reduce Customer Acquisition Costs

Here are 5 ways to reduce customer acquisition costs:

How to reduce CAC #1: Retargeting

One of the easiest ways to bring users back into the funnel and have an optimal CAC is by utilizing retargeting (called remarketing in the Google Ads platform). You can leverage the Google Ads display network or Facebook Ads to do this.

Using a combination of these two channels ensures that you’re reaching your remarketing audience at every step of the funnel, increasing the likelihood that they will convert.

How to reduce CAC #2: Conversion rate optimization (CRO)

Improve on-site conversion metrics: One may set up goals on Google Analytics and perform A/B split testing with new checkout systems in order to reduce shopping cart abandonment rate and improve the landing page, site speed, mobile optimization, and other factors to enhance overall site performance.

Use these 14 conversion rate optimization tools to dramatically increase your ROI in 2021

How to reduce CAC #3: Customer relationship management

Implement customer relationship management (CRM): Nearly all successful companies that have repeat buyers implement some form of CRM.

This may be a complex sales team using a cloud-based sales tracking system, automated email lists, blogs, loyalty programs, and/or other techniques that capture customer loyalty.

How to reduce CAV #4: Improve your ad copy

One version of your ad copy could give you good results, but you can always make those results better by optimizing your copy. 

Look at the click-through rates to identify your best-performing ads and see how they differ from ads that don’t perform as well. Pause your low-performing ads and write variations that are similar in style and language to the stronger ads. 

Constantly improving and optimizing aspects of your paid media strategy is imperative for reducing CAC in the long term.

Here are 10 Facebook ad examples that should have you reducing your CAC in no time!

How to reduce CAC #5: Marketing automation

Using marketing automation tools, such as chatbots with automated lead nurture and email drip campaigns, can also help reduce your CAC. A good example is promoting a free trial or white paper through your paid media efforts, and then using the emails you’ve acquired in a lead nurture.

Think about the value you can offer to these leads. They’re already in your pipeline. Having a strong lead nurture workflow can help convert those leads into paying customers.

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