Customer Acquisition Cost (CAC)
Customer acquisition cost, or CAC, refers to the total sum for marketing and sales expenses the company spends to acquire a new customer. This metric reflects the future success of the enterprise because the less CAC, the more profitable the business is.
That’s why CAC is connected with the CLV (Customer Lifetime Value) and the resulting ROI (Return on Investment) – if the CAC is higher than ROI or CLV an enterprise isn’t considered profitable.
Components of CAC
Customer acquisition cost includes the total of marketing and sales expenses, which include:
- Advertising, that includes traditional advertising (TV ads, direct mail) and also online ads (paid promo, social media marketing, referrals)
- Discounts for listed items on a special occasion (for example, a company’s birthday or local holidays)
- Sponsorships of conferences and sporting events
- Applications and tools such as customer relationship management (CRM) system and marketing automation tools (Eloqua, Hubspot, etc.)
- Salaries for marketing and sales staff
Calculation of CAC
CAC is calculated in accordance with a certain period of time that can be on a monthly, quarterly, or annual basis. The formula looks as follows:
Sum total of all sales and marketing expenses \ Number of customers acquired
Using the same reporting period one is able to calculate a company’s CAC for this period with ease. For example, if a company earned $10,000 and had 100 new customers during the last month, the customer acquisition cost is $100.
Ways to improve CAC
It is important to have a low CAC so that a company can acquire new customers without investing a lot of money. There are some effective ways to reduce the enterprise’s CAC like:
- Pricing strategy optimization. The pricing for goods and services should recover the expenses for customer acquisition and help the company gain profit. Another key factor is CLV: companies should aim to acquire as many customers on a long-time basis as possible and good pricing is what can convince your customers to stay.
- Improve the effectiveness of marketing and sales. By investing in channels that have proven to be effective, the company can save its budget and acquire even more customers
- Faster customer’s and prospect’s engagement. To reduce the company’s CAC, new customers should be more interested in buying its products. To achieve this, businesses should constantly improve their closed-loop marketing strategies.
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