CAC… You see it everywhere. And for good reason. CAC – customer acquisition cost – is the amount of money that a company spends to get a new customer. Business growth is important, but if the amount of money you’re spending to get new customers is too high, your company won’t survive. That’s why customer acquisition cost is so essential.
In this article, we’ll teach you how to calculate your organization’s CAC and what to do with the number once you have it. Plus, get pro tips on how to improve your acquisition cost so you can gain more new customers at a lower price for your company.
What Is Customer Acquisition Cost (CAC)?
Customer acquisition cost, or CAC, is defined as the amount of money that a company spends (on advertising, marketing, and other sales initiatives) to convert a lead into a new customer. The most basic method of calculating CAC is to take your advertising costs and divide that number by the number of customers you have acquired.
This number is essential. It allows you to be more effective and strategic in sales and marketing, bringing in new customers at a lower cost.
And for any brand looking to succeed – industry estimates indicate that within the last five years, average customer acquisition costs have increased by up to 60%.
How to Calculate CAC
The formula to calculate customer acquisition cost is:
Cost of Sales and Marketing ÷ Number of New Customers Acquired = Customer Acquisition Cost
Calculate your CAC by choosing a specific time period to evaluate. For instance, you could take your sales and marketing costs from last quarter divided by the number of new customers you acquired in that quarter.
Examples of sales and marketing costs might include:
- Salaries for sales and marketing employees (prorated according to the time period you’re evaluating)
- Contractors or consultants
- Advertising and marketing costs (such as PPC ads, Google Ads, etc.)
- Sales and marketing automation tools, analytics tools, software, etc.
- Design costs
- Rent, utilities, or equipment
After running this CAC formula, the answer you end up with will be your organization’s estimated cost to get a new customer. (You can also use an online CAC calculator instead of working out the equation manually.)
CAC Example
Here’s an example of how this customer acquisition formula might look in practice:
Your company spent a total of $80,000 on marketing and sales efforts in Q1. You also gained 85 new customers during that time.
80,000 ÷ 85 = 941
Last quarter, your customer acquisition cost was $941. This means you spent approximately $941 to acquire each customer.
Why CAC Is Important
Customer acquisition cost is an important marketing metric to keep up with. Knowing your CAC provides valuable insight into your investment, helping you ensure that you’re making the correct decisions to help your company grow – and informing your marketing and sales strategy along the way. Your CAC makes it easier for you to:
- Improve the efficiency of your marketing and sales efforts
- Create a marketing and sales budget
- Gain visibility into each stage of your sales funnel
- Make smarter decisions
CAC and Customer Lifetime Value (CLV)
Another helpful metric to understand is customer lifetime value (CLV). The lifetime value of a customer is the total revenue that you can get from a customer over the duration of their relationship with your brand.
When it comes to how CAC and CLV compare, your CLV should be higher. You can earn a higher profit when it takes you less money to acquire a customer who will then spend more money over time.
You can find CLV by using this formula:
Your Annual Revenue x Average Customer Lifespan = Revenue Earned From One Customer
Then, compare your CLV to your CAC and see how these metrics stack up. The CLV:CAC ratio indicates your projected revenue.
How to Improve Your CAC
Ideally, you want the cost of acquiring a new customer to be as low as possible. But keep in mind that a low CAC isn’t always a good thing. If your acquisition cost gets too low, this could mean that the quality of your marketing and sales efforts is decreasing.
What’s more, a low CAC might also be a bad sign if you have low retention rates – acquiring customers is great, but you also want them to stick around.
However, overall, most companies could likely stand to improve their CAC by helping the number go down. Here are a few tips to help.
Target The Right Audience
Are your marketing and sales efforts targeting the right audience? Are you sure? If not, it’s worth going back to the drawing board and making sure you’re reaching out to the appropriate demographic. If you aren’t targeting the best audience for your brand, it will be more difficult to get new customers, and your CAC might be unnecessarily high.
Use Ambassadors, Advocates, or Affiliates
Make your digital marketing more affordable by leaning into low-cost marketing strategies. For example, instead of working with influencers (who typically ask for cash or free products in exchange for their social media posts), consider using brand ambassadors, brand advocates, or affiliates instead.
This is still an effective strategy: On average, brands see a 650% ROI for every dollar invested in advocacy marketing. And working with ambassadors or affiliates will likely come out to a lower cost than working with influencers.
Run A/B Testing
When you run A/B testing (also called split testing), you divide your audience into two groups and show each one a different iteration of a campaign. For instance, you might send two emails that are the same except for the subject lines. Then you’ll take note of which subject line gets more opens.
A/B testing can improve your customer acquisition cost because it gives you an idea of which marketing content will perform better. Once you know that information, you can focus on the strategies that are most effective without wasting time or money on the others.
Lower Your CAC With Customer Reviews
Customer acquisition cost helps you understand the best ways of drawing more business to your company. Another helpful tip to gain new customers? Utilize customer reviews. Asking your current customers to write online reviews about their experience with your brand is an easy, affordable way to help new customers understand – and desire – your offer. Sign up for a free business account with Sitejabber to learn more about how online reviews can help.
