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Customer Acquisition Cost (CAC)

Customer Acquisition Cost is the cost associated in convincing a customer to buy a product/service. This cost is incurred by the organization to convince a potential customer. This cost is inclusive of the product cost as well as the cost involved in research, marketing, and accessibility costs. This is an important business metric. It plays a major role in calculating the value of the customer to the company and the resulting return on investment (ROI) of acquisition. The calculation of customer valuation helps a company decide how much of its resources can be profitably spent on a particular customer. In general terms, it helps to decide the worth of the customer to the company. Customer Acquisition Cost (abbreviated to CAC) refers to the resources that a business must allocate (financial or otherwise) in order to acquire an additional customer. Numerically, customer acquisition cost is typically expressed as a ratio — dividing the sum total of CAC by the number of additional patrons acquired by the business as a result of the customer acquisition strategy.[1]


Customer Acquisition Cost (CAC) is the cost that is required for a business to secure a customer. Businesses keep track of this to have an idea of how to allocate resources when they are trying to gain new customers. This cost includes all expenses to close the deal with a potential customer, such as research, advertising, and incentives. Businesses use this metric to help manage finances and set limits on how much they are willing to spend to acquire new customers. Managing a company’s CAC helps that company make more informed business decisions. It is important to not spend more trying to acquire a customer than the value the customer is expected to provide over its lifecycle. For this reason, companies often set goals and maximum limits on their customer acquisition costs. This prevents them from going overboard on spending when reaching out to potential new customers. A high CAC can result from inefficient marketing campaigns. Although a well managed SEO strategy can greatly lower costs, mishandled Google AdWords campaigns can negate those positive SEO effects. A great way for a company to lower CAC is by focusing on inbound marketing, including content creation, social media networks, and other free mediums of reaching out to customers.[2]


Customer Acquisition Cost Formula (Calculating CAC).[3]
One way to calculate CAC is to consider the three variables that composes it. This method allows you to go into detail and might give you good insights about your sales process cost and conversions, but can be tricky to get right

CPL (Cost Per Lead) (e.g. marketing costs); Touch cost (e.g. sales staff salaries); Conversion rates at each stage of the sales process.

CAC = (CPL per customer + 'touch' costs per customer) * Conversion rate

An easier way to do it is sum all of your Sales & Marketing expenses and divide it by the number of customers acquired on a given period. So let's say you've spend $1,000 this month on sales & marketing and have acquired 5 news customers. Your CAC would be $200, which means you've spent $200 to brign each new customer in.

CAC = Total Sales & Marketing expenses / # of New Customers


Improving Customer Acquisition Cost[4]
There are several methods your business can use to improve its CAC in its industry:

  • 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.
  • Enhance user value: By the highly conceptual notion of “user value,” we mean the ability to generate something pleasing to the users. This may be additional feature enhancements/qualities that consumers have expressed interest in. It may be implementing something to improve the existing product for greater positioning, or developing new ways to make money from existing customers. For instance, you may realize that customer satisfaction ratings have a positive correlation with retention rate.
  • 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.


The Importance of CAC in eCommerce[5]
The cost of customer acquisition is one of the MOST important metrics for any ecommerce store, along with the lifetime value of a customer. Why? Because your store needs to make money. Which means you need to get a return on investment (ROI) from your marketing and sales campaigns.The important ratio to focus on, then, is one that tells you exactly how much value you're making from your customers in relation to how much it cost me to acquire them:


LTV:CAC

It's as simple as this: your business will fail if your CAC is higher than your LTV. Here are a few scenarios to assess what you should be aiming for with regards to the LTV:CAC ratio.

Less than 1:1- You’re on the road to oblivion, and fast

1:1 - You’re losing money from every acquisition

3:1 - The perfect level. You have a thriving business and a solid business model.

4:1 - Great news but you’re under investing and could be growing faster. Start more aggressive campaigns to acquire customers and bring your ratio closer to 3:1

As well as the above you need CAC to assess how your marketing campaigns are performing. The goal is to find the marketing channels that have both a high LTV:CAC ratio and are scalable. There is no use only focusing all your time on channels that send only a very small amount of customers. Find the right balance between time/effort, LTV:CAC and quantity of customers acquired.

To summarise, there are two key reasons that CAC is very important:

1) Working out your LTV:CAC ratio and the months required to recover your CAC helps you analyse the overall health of your business. Figuring out the months required to recover CoCA is very useful to determine how strong your business model is. It’s no good if it will take three years to recover your initial investment because you need to reinvest that money. A great target to aim for is anything under 12 months.

2) CAC helps you optimise your marketing campaigns and channels - Where are you acquiring your best customers from? What channels and campaigns have the best LTV:CAC ratio? Remember that customer acquisition cost for different campaigns are not constant. They change all the time and you must be vigilant of this - when you stop getting an ROI then stop the investment.


See Also

Customer
Customer Centricity
Customer Churn
Customer Data Integration (CDI)
Customer Data Management (CDM)
Customer Demographics
Customer Due Diligence (CDD)
Customer Dynamics
Customer Effort Score (CES)
Customer Engagement
Customer Engagement Hub (CEH)
Customer Experience Management (CEM)
Customer Lifecycle
Customer Lifetime Value
Customer Loyalty
Customer Needs
Customer Service
Customer Service Management
Customer Relationship Management (CRM)
Customer Retention


References

  1. What is Customer Acquisition (CAC)? Wikipedia?
  2. Customer Acquisition Cost (CAC) Definition Trackmaven
  3. Customer Acquisition Cost Formula to Calculate CAC?
  4. Methods that businesses can use to improve CAC Acquisition Cost - How you can improve CAC
  5. How to Calculate Cost of Customer Acquisition (CAC) in Ecommerce Ometria


Further Reading

  • Startup Killer: the Cost of Customer AcquisitionFor Entrepreneurs
  • Customer Acquisition Cost: The One Metric That Can Determine Your Company’s Fate KissMetrics
  • The Magic Formulas: Customer Lifetime Value and Customer Acquisition Cost Sailthru
  • How Much Did That New Customer Cost You? Entrepreneur