Customer Acquisition Cost (CAC)Link to this section
Customer acquisition cost (CAC) is a helpful metric for understanding the costs involved in winning new customers.
By calculating your CAC, your company can figure out how much you’re spending on bringing in new users, and whether this number is changing over time. When used alongside other metrics (such as lifetime value, known as LTV), you can start to understand whether you’re attracting high-quality customers and if you need to rethink your approach to acquisition.
What is customer acquisition cost (CAC)?Link to this section
CAC is a measure of the cost of bringing in a new customer. The exact expenses you include in your calculations will depend on your company’s acquisition strategies. Generally speaking, CAC includes any marketing spend and potentially stretches to include things like the wages of your sales team.
CAC is often compared against a customer’s LTV (using the CAC:LTV ratio), which helps you understand the return on investment from each user you acquire.
It’s important to remember that CAC is a moment-in-time measurement. That means that it offers a snapshot of how expensive it is to acquire new users in a specific time period.
By comparing acquisition costs over a range of time periods, you can track changes in your CAC. From there, you can start to review what factors might have caused your CAC to rise or fall, whether that’s from a shift in your acquisition channels or changes to your marketing budget.
How to calculate CACLink to this section
CAC is calculated by adding up your total sales and marketing expenses within a specific time frame (weekly, monthly, quarterly, or annually) and dividing this by the number of customers actually acquired in that time frame.
CAC = Total marketing & sales spend / new customers
The total sales and marketing costs include anything you’ve spent on acquiring customers, whether that’s ad campaigns, SEO marketing, content marketing, and the salaries of sales and marketing teams.
Why is CAC important?Link to this section
As a company, you want to figure out how to attract high-value customers in a cost-effective way. By calculating your CAC and tracking how it changes over time, you can start to understand how much you’re spending on winning new users.
On its own, CAC can only tell you so much. But, it’s a powerful comparison tool that can be paired with other financial metrics to evaluate the performance of your marketing efforts.
- Track changes in acquisition costs over time: CAC provides a snapshot of your acquisition costs in a specific time period. By comparing CAC across a number of different time periods, you can pick up trends and significant changes in your acquisition costs.
- Building block for other financial metrics: when paired with LTV, the CAC:LTV ratio can start to reveal more nuanced insights about the return on investment you’re getting from every customer.
- Evaluate acquisition channels: if you’re able to break down your CAC metric by different acquisition channels, you can assess which channels are most cost-effective for your company. From there, it’s important to assess the quality of users you’re acquiring (through metrics like LTV).
Different ways of looking at CACLink to this section
There are two different ways of looking at CAC: Blended CAC and Paid CAC.
Blended CAC provides a more comprehensive and top-line view of the total cost of acquiring customers. On the other hand, Paid CAC is a more specific metric used to analyze the effectiveness of paid marketing campaigns.
Blended CACLink to this section
Blended CAC takes into account all of the costs associated with acquiring a customer through a bunch of different marketing and sales channels such as email marketing, social media, paid advertising, and more. This includes channels you don’t directly pay for.
Blended CAC is calculated by dividing the total cost of customer acquisition by the total number of customers acquired.
Paid CACLink to this section
Paid CAC involves the costs you incur to acquire new customers through paid marketing channels only. Paid CAC is calculated by dividing the total cost of paid marketing campaigns by the number of new customers acquired in that timeframe.
Strategies to improve CACLink to this section
Acquiring high-value customers in a cost-efficient way is difficult. If you’re not there yet, here are a few strategies to consider.
1. Focus on your target audienceLink to this section
One of the best ways to improve your CAC is by understanding and refining your target audience. By figuring out who your ideal customer is and identifying their characteristics, interests, and behaviors you can create specific marketing strategies that will attract your audience.
This can reduce wasteful spending on marketing efforts and channels that aren’t providing you with high-value customers and will ultimately improve your CAC.
2. Optimize your websiteLink to this section
Your website can be one of the first interactions a customer has with your business, so it’s important to optimize your website to convert potential customers into paying customers. You want to create a frictionless experience that can improve conversion rates and decrease your CAC.
- Clear, action-driving messaging: clearly communicate your products and services, their benefits, and their unique value proposition. Then, make sure to clearly communicate the action you want users to take, such as redeeming a free trial or booking in a demo.
- Harness a lead magnet: whether it’s downloading an educational ebook or booking a free product demo, collect lead data from your website visitors. This allows you to follow up and nurture these warm leads with automated email campaigns that will get them closer to signing up and converting.
3. Refine your sales funnelLink to this section
An optimized sales funnel can decrease your CAC by guiding potential customers through the buying process from awareness to purchase. Make sure you’re using a customer relationship management (CRM) tool to manage your sales funnel and keep track of potential customers and their behaviors.
By arming your sales and business development team with the right tools, you can streamline the sales process, fast-track the onboarding process, and reduce the time and money spent on customer acquisition.
CAC gives you an accurate picture of how expensive it is to acquire customers. By tracking your CAC over time, you can identify trends in your acquisition costs. Plus, you can use CAC as a comparison tool by pairing it with other metrics, such as LTV, to learn more about how cost-efficient it is to acquire new users.
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