What is customer acquisition cost (CAC)?

Customer acquisition cost measures the total expenditures involved with sales and marketing. Today’s highly targeted digital marketing campaigns make it easier than ever to track consumers as they transition from leads to loyal customers. We’ll explore how CAC is calculated and why it’s so important below.

What is customer acquisition cost?

How much does your business need to spend to bring in each new customer? Customer acquisition cost (CAC) is a handy metric quantifying the total cost of sales and marketing.

Costs included in customer acquisition might include things like:

• Advertising costs
• Production costs
• Publishing costs
• Sales commissions
• Bonuses
• Technical costs
• Overhead costs
• Creative costs
• Marketing costs
• Inventory maintenance and upkeep

 It’s not only useful for budgeting purposes, but also indicates the viability of your business model. If your CAC is too high, you’ll need to wait longer to see a return on your investment. By finding ways to reduce marketing spend required for new customers, businesses can increase profit accordingly.

Understanding customer acquisition

In order to calculate CAC, you first need to break down the various elements of acquisition marketing strategies. Customer acquisition simply refers to the process of gaining new clients and analyzing their numerical value to the company. The goal is to bring in the highest value clients at the lowest possible cost.

Customer acquisition strategies focus on each stage of the marketing funnel, starting with the moment the customer first becomes aware of a business. At this stage, they may visit your website for the first time or browse a list of products that you sell. As they move down the funnel to interest, the customer might take actions including researching your products, signing up for a mailing list, or reading reviews.

Finally, conversion takes place and the lead transitions into a customer by making a purchase. It’s important to understand this sales acquisition process to determine where to allocate marketing funds at each stage.

Why is CAC important?

Understanding acquisition cost offers an array of benefits. Not only can you craft more realistic financial projections, but you can find ways to save money with your acquisition strategy for greater profit. CAC calculations help businesses allocate resources more effectively, secure funding from investors, and avoid wasting efforts on lower quality leads. In marketing, this metric is used to maximize returns on advertising campaigns.

How to calculate acquisition cost

The variables used to calculate acquisition cost will depend on your marketing approach. To get started, look at all the various channels used by your sales and marketing teams to generate leads. You’ll also need to find the number of customers you’ve acquired for the period in question. You can then plug these numbers into the customer acquisition cost formula:

CAC = Total Sales and Marketing Costs / Number of Customers Acquired

For example, imagine that Company XYZ spends $1,000 on sales costs and $2,000 on marketing throughout the month of November. During this same time, the company brings in 300 new customers. The customer acquisition cost for November would be:

(1,000 + 2,000) / 300 = $10

In other words, Company XYZ spent $10 to convert each lead into a customer. It’s important to note that there’s no single definition of a ‘good’ CAC. While $10 per conversion may be a good rate in one industry, it could be far over budget in another. It’s recommended to not only take industry standard into account, but also compare CAC to additional metrics including customer lifetime value (CLV). Ideally, the CLV to CAC ratio should be 3:1.

One thing to note is that some marketing efforts might not pay off immediately. The company may invest in a long-term advertising campaign that converts a lead into a customer, months or even years after it’s been paid for.

Estimating the cost of customer acquisition strategies

The best acquisition marketing strategy will depend on your industry, target demographic, and budget. A multi-channel approach tends to be most effective. To minimize unnecessary cost, you should first identify your ideal customers along with the channels they are most likely to frequent.

Low-cost strategies:

• Giveaways to boost brand awareness
• On-page SEO to attract site visitors
• Video content to encourage customer engagement
• Referral programs for existing customers
• Programs to connect affiliate advertisers with niche publishers
• Company newsletters and email campaigns

High-cost customer acquisition strategies:

• Paid search campaigns
• Google AdWords
• Paid social media advertisements
• Traditional TV and print advertising

Ideally, you’ll calculate the CAC for each of these channels to pick and choose the approach that best suits your budget. Pull out your receipts for each channel, dividing them into categories like ‘PPC’ and ‘Inbound Marketing’. Compare each channel’s costs with the customers it pulled in to see which strategies are paying off. In many cases, a multi-channel approach works best. For example, outdoor billboards reinforce online advertisements for greater brand recognition.

Today’s consumers also often use multiple devices in a user journey, which is where our advertiser tools like Cross Device Tracking can help. These give greater insight into how customers are interacting across multiple channels and devices, so that you can cut costs with more refined targeting. Plus, SingleView – Awin’s performance marketing attribution platform – can help advertisers calculate CAC, making it a useful option for advertisers to explore.

How to improve your CAC

Once you’ve calculated CAC and identified the sources of acquisition costs, how can you find ways to improve profit margins?

• Entice users with added value: Make sure your products or services sell themselves. Carefully research your target demographic’s needs to solve their problems with additional enhancements or features.
• Improve website performance: Use A/B testing and visitor tracking tools like Google Analytics to probe how users are interacting with your site. Reduce shopping cart abandonment rates with improvements to user friendliness and site performance.
• Retarget sales leads: If a lead’s already aware of your brand, they’re further down the marketing funnel and it will take less money to achieve conversion. Use gentle reminders to encourage these leads to revisit your website and make a purchase.
• Use affiliate partners: Harness the power of industry influencers for new customer acquisition. Affiliate partners engage with clients to boost your own brand awareness as an advertiser. You only pay a commission after a new customer has made sale.
• Provide consistent content: Whether it’s on your own website and social media channels or via affiliate partners, high-quality content is one of the most cost-effective ways to keep potential customers engaged.

By finding ways to lower your customer acquisition cost, you’ll put your business in a better position to maximize profits. Affiliate marketing partners provide wider reach at lower cost. Streamline your marketing and sales efforts by focusing on channels with proven returns.