The evolution of digital advertising and the ability to track consumer behavior online has increased the significance of the customer acquisition cost (CAC) metric.
In the past, companies had limited methods to assess the effectiveness of their advertising campaigns and track consumer decision-making.
With the dawn of web-based companies and targeted advertising campaigns, CAC has become a critical tool for companies and investors to measure success.
CAC refers to the cost of acquiring a customer through marketing and sales efforts. It measures the monetary and other resources invested in converting a potential customer into an actual customer.
In this article, you’ll learn what the CAC metric is and its calculation. We’ll also share super actionable strategies to optimize it.
What Is Customer Acquisition Cost?
The expense incurred to attract new consumers is referred to as the customer acquisition cost (CAC).
This value is derived by dividing the overall expense of marketing strategies to attract new customers by the total number of new customers obtained within a specified period.
For businesses, the customer acquisition cost (CAC) is a critical indicator that can inform and shape future advertising and product marketing endeavors.
By monitoring CAC, businesses can learn the cost of acquiring each customer through various channels and campaigns. That’s why businesses must keep track of this metric.
What factors influence the price of acquiring new customers?
Here are some examples of the factors you’d examine when you’re ready to calculate customer acquisition costs as a service-based business:
- The advertising costs
- Expenses incurred by your marketing staff
- Expenses related to sales rep costs
- Creative costs
- Expenses incurred due to technical costs
- The publishing costs
- The production costs.
Customer Acquisition Cost Model (CAC) Example
Say you are a business that sells coaching courses. You have spent $10,000 in the last six months on marketing and sales strategies to get new customers.
As a result, you have 100 new customers. To calculate customer acquisition cost, you’d divide $10,000 by 100. This means that the average cost of winning a customer is $100. Below we’ll go deeper into the formula to use when you’re ready to calculate CAC for your business.
How to Calculate Customer Acquisition Cost
How to find customer acquisition cost is by using a formula:
Customer Acquisition Cost Formula =
CAC Total Cost of Acquiring Customers / Number of Customers Acquired
To figure out CAC, you must first figure out all the costs of getting new customers. This include:
- Marketing expenses (such as advertising, social media campaigns, etc.)
- Sales costs (such as salaries and commissions)
- Other overhead costs (such as office space).
Once you know all the costs of getting new customers, you can divide this total cost by the number of new customers you get in a certain time frame.
Customer Acquisition Cost vs Lifetime Value
CLV, or customer lifetime value, represents the estimated revenue a business can expect to generate from a customer throughout their journey with the business.
Consider this scenario: A customer signs up for a product with a one-year subscription plan.
In this case, their lifetime value would equal that year’s expected revenue.
The longer customers stay engaged with a business, the more frequently they purchase and the higher their CLV.
Businesses can focus on attracting and acquiring more customers with similar characteristics by determining which customer profiles bring in the highest CLV.
If you haven’t calculated your CLV yet, here’s a great article where you’ll learn how to calculate customer lifetime value (CLV).
As discussed earlier in this article, the CAC is the cost of acquiring new customers.
The LTV-to-CAC ratio of your business is a quick way to understand the worth of a customer based on the cost of acquiring them. You can get this ratio by dividing the LTV by your CAC.
How to Track Customer Acquisition Cost?
CAC tracking is critical for businesses to understand how much it costs to acquire each customer. To track CAC, you need a system that can follow all the costs associated with acquiring customers.
Here are some ways to track customer acquisition costs:
Ask How Customers Found You
By simply asking customers how they heard about your business, you can gain valuable insights into which channels are most effective for customer acquisition. This information can then be used to plan marketing and sales strategies and budgets.
By tracking how much it costs to get a new customer over time, businesses can spot trends in their CAC and make changes. A simple and effective technique to measure CAC is to ask consumers how they heard about your company. If they say that they saw an ad on social media, you will know that this customer cost money to acquire. If the customer came through word of mouth referral, they were free!
Use Google Sheets
Google Sheets is a powerful tool for tracking customer acquisition costs. You can easily make a spreadsheet in Google Sheets to keep track of all the costs of getting new customers. This includes marketing expenses, sales costs, and other overhead costs.
You can use formulas in Google Sheets to calculate CAC quickly and accurately.
Use Software or Code
Using software or a code to track customer acquisition cost is an excellent way to measure CAC quickly and accurately. Firms can track CAC with the help of many software solutions, such as Salesforce, HubSpot, and Marketo.
These solutions make it easy for businesses to keep track of all the costs of getting new customers, such as marketing costs, sales costs, and other “overhead” costs. These technologies provide firms with insights into which client acquisition channels are most efficient.
Google Analytics
Google Analytics is a fantastic tool for tracking the cost of customer acquisition. Businesses can use Google Analytics to track how well their marketing campaigns work and determine which channels bring in the most customers.
Google Analytics provides businesses with insights into how customers interact with their websites. This lets them see which pages customers visit and how long they stay on each page. This information can be used to inform marketing strategies and budgeting decisions.
CAC for Each Marketing Channel
Most marketers want to know the CAC for each of their paid marketing channels. You know where to increase your marketing spend if you know which channels have the lowest CAC. The more your marketing budget you can dedicate to lower CAC channels, the more clients you can get for a set expenditure.
Some of the most popular digital marketing channels are the following:
Search Engine Optimization (SEO)
SEO improves your website’s search engine rankings for business-related keywords
Example: An Internet marketing business will charge $4,000 to $10,000 for SEO setup and $1,000 each month.
To figure out how much it costs to get a new customer through SEO, add up all of the costs, both money and time. Divide that figure by the entire number of SEO conversions, which analytics tools can track.
If you spent $10,000 on SEO and gained 10,000 organic consumers in a year, your CAC would be $1.
SEO is inexpensive and lets you reach your best prospects online.
Pay-per-Click (PPC)
PPC advertising lets you choose keywords and phrases to activate ads. If your bids are high, your ads will show up above the organic search results for your chosen keywords and phrases.
After you’ve paid between $4,000 and $10,000 to set up your PPC campaigns, each click will only cost a few cents.
Analytics software can track PPC ad conversions. If you use huge platforms like Google AdWords, these calculations are automatic, and you can view your CAC in the analytics section.
E-mail Marketing
Email marketing costs are comparable to SEO and PPC.
Example: Internet marketing firms charge $4,000–$10,000 upfront. This works out to a few cents to $3 per qualifying visitor and $500 per month.
Email marketing lets potential customers interact with your content without interrupting their day, and 72% of U.S. adults prefer it to telemarketing.
Content Marketing
Content marketing doesn’t have any ongoing costs, so as more customers buy from you, your CAC per item will go down. It also educates consumers about potential purchases, adding value to the buying cycle.
Example: Content marketing costs can initially cost around $6,000–12,000 for a business. However, if you choose evergreen topics, your content might keep bringing in new clients for free.
Tips to Improve Customer Acquisition Cost
Once you have tracked your CAC, there are several strategies you can use to reduce it.
Improve On-site Conversion Metrics
One of the best ways to cut down on customer acquisition costs is to improve the metrics for converting visitors to your site. By making your website easier for people to buy from or sign up for your service, you may get more people to do so.
This can be done by improving website design, ensuring the checkout process is easy and intuitive and ensuring that all pages are optimized for mobile devices.
You can use A/B testing to determine which parts of your website are better at turning visitors into customers. That way, when you calculate customer acquisition cost after making changes, you’ll see the impact on your bottom line of having a more effective website user experience.
Enhance User Value
Reducing CAC can also be achieved by improving the value customers receive from your product or service. You can accomplish this by introducing new features, exceptional customer support, and providing discounts or special promotions.
Another approach to consider is creating compelling content showcasing the benefits of your product or service, ultimately inciting a desire to purchase.
Implement Customer Relationship Management (CRM)
CRM (Customer Relationship Management) is a customer experience management system. It’s a technology that logs, tracks, and consolidates lead, prospect, and customer information.
Also, CRM helps organizations gain insights into customer behavior and preferences and provides a 360-degree view of leads, prospects, and customers to support and improve the buyer journey.
It also integrates all customer data into one system, allowing teams to use it to inform targeted and relevant customer interactions and drive higher customer retention.
CRM systems can provide insights to improve sales conversations’ relevancy and value, reducing customer acquisition costs.
We like to use Active Campaign at Scaling With Systems.
Optimize Marketing Channels
Optimize your marketing channels to reach the right customers with the right message at the right time. That can help decrease CAC by making your marketing efforts more successful and efficient.
That way, you can decide which channels get you the most clients so that you can focus your efforts on those channels.
Customer Acquisition Cost: FAQs
What is customer acquisition cost?
Customer acquisition cost (CAC) is a crucial metric in marketing that quantifies the amount a company must spend to secure a new customer.
Companies use various methods, such as paying for banner clicks, creating engaging graphics, and writing articles, to attract potential customers and measure their investment’s ROI with CAC.
By closely tracking CAC, companies can evaluate the effectiveness of their customer acquisition efforts and make informed decisions to grow their customer base.
What are examples of customer acquisition costs?
Examples of customer acquisition costs that you’ll examine as you calculate CAC include:
- Marketing expenses (such as advertising, social media campaigns, etc.)
- Sales costs (such as salaries and commissions)
- Other overhead costs (such as office space).
Why is customer acquisition cost important?
Customer acquisition cost (CAC) is a crucial metric in marketing that quantifies the amount a company must spend to secure a new customer. By closely tracking CAC, companies can evaluate the effectiveness of their customer acquisition efforts and make informed decisions to grow their customer base.
How to reduce customer acquisition costs?
- Improve on-site conversion metrics
- Enhance user value
- Implement customer relationship management (CRM)
- Optimize marketing channels
The Bottom Line: Calculate CAC
Data-driven decisions can launch your company to the forefront of the industry and give you the confidence to believe in your success.
Customer acquisition cost is more than just a number; it’s a tool for growth and innovation. You’re building a solid foundation for a thriving business that attracts and retains customers by tracking and optimizing your CAC.
CAC guides you in allocating resources, crafting winning marketing strategies, and making informed decisions in your client acquisition efforts.
Unlock limitless potential with Scaling With Systems.
Discover new business opportunities, attract loyal customers, and achieve profitability with our expert-driven customer acquisition strategies.
Book a free consultation call and take the first step toward success.
