December 21, 2021
Customer Acquisition Cost is one of the best metrics to determine whether your business model is profitable or not.
CAC is an important metric to consider when evaluating your marketing initiatives. However, like many aspects of the online marketing world, the term “Customer Acquisition Cost” can be both confusing and vague.
In this article, we’ll define customer acquisition cost, walk you through how to calculate it, and help you improve it. Keep reading.
Customer acquisition cost (CAC) is a ratio that tells you how much it costs to acquire a new customer.
It is the total cost of finding and acquiring a new customer. CAC consists of all expenses associated with marketing a product to bring in a new customer.
These expenses include the cost of your sales team, advertising costs, cost of your marketing team, creative costs, technical costs, publishing costs, production costs, and inventory upkeep.
It’s important to understand how much you’re spending on acquiring new customers and how long it takes for them to become profitable. You can then compare this return-on-investment (ROI) with the expected revenue from each customer and make decisions based on that data.
It’s pretty simple to calculate your CAC. Add up all the costs associated with acquiring new customers (basically whatever you’ve spent on marketing & sales). And then divide that amount by the number of customers you acquired.
The formula looks like this:
Acquisition Cost = Total Marketing Investment / Number of new customers acquired
For example, consider a company that spent $5,000 on a marketing campaign and got 500 new customers. The company’s CAC is $10 — meaning it spends $10 to generate $1 in revenue from new customers. Another way to think about this is that it costs the company $10 to sell a $1 product.
Although this formula is simple enough, adding all the expenses of marketing can be tricky. This will also include employees’ salaries and different channels you used for marketing.
Therefore, if you don’t know what your marketing costs (sales & other expenses) are, consider including the following.
Great employees may appear to be costly, but they are always worth the investment. If you are worried about finding to make budget cuts for salary expenses, there may be other ways to save money without laying off or reducing the pay. For example, chatbots, marketing automation software, or outsourcing can augment your team’s workflow and improve productivity.
Advertisement can be your biggest source to attract leads and customers. It’s also not going to be cheap. If you’re not sure whether you’re getting a good return on a marketing campaign, you can calculate its worth by dividing the revenue generated by advertising — by the amount of money spent on that campaign.
Creative costs can be hiring creative people to promote your brand. It is the amount you spend on creating content. Or whatever comes in between content production.
This simply means releasing your marketing campaign for your audience. This could be paid social media ads, PPC ads & SEO, or an ad release for YouTube.
Technical costs include all the tech your marketing and sales team use. It could be an SEO tool, analytics tool, or any other software.
Production costs come under the budget you make for physically creating content. For example, if you run a podcast, you’ll need mics, headphones, audio interface, mic stands, and so on.
If you sell physical products, you’ll have to pay for a storage facility. It would also include utility bills. And, if you have a SaaS product, this is the money you’d spend on updates and patches to improve the user experience.
Let’s take a few examples and calculate customer acquisition costs.
Let’s say that a project management software company spends $20,000 on a marketing campaign. After the campaign, the company discovers that 800 new customers started a subscription for their service.
Every year, the SaaS company also spends an extra $40,000 on technical, maintenance, and production costs for these new customers.
The CAC formula for this company would be:
CAC = ($20,000 + $40,000) ÷ 800 = $60,000 ÷ 800 = $75
This means the SaaS company spent $75 to acquire every new customer.
If a manufacturing company that sells components spends $12,000 on marketing strategy and $6,000 on sales. But acquire 250 new customers,
Then the CAC formula would be:
CAC = ($12,000 + $6,000) ÷ 250 = $18,000 ÷ 250 = $72
A real estate company that sells studio apartments spends $30,000 on marketing and $15,000 on sales. But acquires 100 new customers,
Then the CAC formula would be:
CAC = ($30,000 + $15,000) ÷ 100 = $45,000 ÷ 100 = $450
LTV or CLTV stands for customer’s lifetime value. LTV is an estimate of how much revenue a business will generate from a customer before that customer stops doing business with them.
LTV is an important metric in relation to CAC. Because it allows businesses to determine the time period it takes to recoup the investment required to acquire a new customer.
The simplest formula for calculating LTV is the average order total multiplied by the average number of purchases in a year multiplied by the average retention time in years. Based on existing data, this calculates the average lifetime value of a customer.
This information, combined with data from specific segments, can be used to better target customer retention and promotional efforts. It also provides a data point for use in customer segmentation.
The ratio that determines how efficient your company is at attracting new customers compared to what they spend on customer acquisition costs is called the LTV CAC ratio. It is also sometimes referred to as “return on advertising” or ROA.
The higher this ratio is, the more efficient your marketing efforts are and the more effective you are at getting ROI out of your marketing campaigns.
Businesses use the LTV to CAC ratio to guide marketing, sales, and customer service spending. LTV: CAC provides a quick snapshot of how much customers are worth in comparison to how much the company is spending to acquire them.
To find out the LTVCAC ratio, you can use this equation:
Customer Lifetime Value / Customer Acquisition Cost = LTV/CAC Ratio
Trying to reduce your cost of customer acquisition is crucial. After all, if you’re spending a lot of money on each new customer, it can be challenging to scale your business. If you have a high CAC, it might not make sense to try and grow your business any faster than that rate.
Therefore, you need to lower your CAC by converting leads into customers. While also providing value to every customer so that they stay as well. Here are some practices that will help you improve your customer acquisition strategy.
Your target market is the most important factor when it comes to increasing your conversion rate. Understand your ideal customer and what they want. Then, offer your product or service in a way that delights them. Reach out to them on social media, create an email list and improve your online presence where your target audience hangs out.
Adding a “call-to-action” button on all of your marketing materials will lead customers to take the next step towards making a purchase. Also, make sure that the link is prominent and easy for customers to understand so that you don’t lose conversions when people do click on it.
Make it easy for your customers to contact you. If you want customers to buy from you then they need to be able to contact you easily before they make a purchase. Your contact information should be easy to find on every page of your website. This way customers can easily get in touch with you if they have any questions or concerns before buying from you.
People buy from people they trust. So, start building relationships with customers by providing them with information and service they can’t get anywhere else. You’ll build credibility, and the customers will feel at ease buying from you.
You don’t have to beak your marketing spend. You can add value by creating content for your website that is helpful for your audience. For example, you could publish informative blog posts about topics that are relevant to your business or industry. You could also create an e-book with comprehensive tips that allow customers to learn from the best.
Get more out of your marketing budget by using blogs as a direct sales channel. By getting in touch with influencers in your niche and offering them exclusive deals or content you can get your product in front of hundreds or even thousands of people who may not have seen it otherwise.
Use a CRM (customer relationship management) system that allows you to track prospects’ behaviors and keep records of how they got in touch with you originally
Train your staff about what qualifies as a lead for each type of product or service you sell, and have them use this criterion when qualifying leads.
Put all leads in a central, organized database where everyone involved in the process can access them (this includes both internal and external parties).
A CRM is a software that helps you to manage your business contacts, sales, and support. It is more than just a contact list or a contact database. Instead, it is a number of sales and marketing tools put together in one place.
Instead of having to navigate between multiple programs to do several simple tasks, you have all the tools you need at your fingertips. It is important to point out that some CRMs come with more features than others. But they all provide the basic functions of a contact list, help desk system, and sales pipeline.
The main benefits of using a CRM are efficiency, flexibility, and better reporting. When you use an integrated CRM program for your business, everything you need is in one place. You can store customer records and track interactions with them as well as manage leads, sales opportunities, and support requests.
Your Customer Acquisition Cost is one of the most important metrics you can track. It can tell you which marketing channels are the most cost-effective, whether it’s worth it to use paid ads, who your ideal potential customer is, and much more.
And of course, once you know how much it costs to acquire new customers, you can make informed business decisions. And also predict how profitable your company is — and will be in the long run.
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