What is Customer Acquisition Cost (CAC)?
Customer acquisition cost (CAC) is a metric representing the total cost it takes a company to gain a new customer. The metric provides clear insights into how efficiently a business attracts new members into its audience. It is also essential for evaluating the effectiveness and return on investment (ROI) of marketing and sales strategies.
The costs associated with acquiring a customer can vary based on company and industry. However, there are some common costs typically included when calculating the metric:
- Marketing and advertising: Marketing salaries, technology fees, creative production, data collection tools, and advertising campaigns.
- Sales: Sales staff salaries, lead-generation software, travel, and gifts for prospects.
How to Calculate Customer Acquisition Cost
Calculating CAC involves three steps:
- Define your evaluation period: Choose a specific timeframe to analyze your customer acquisition efforts.
- Sum your marketing and sales expenses: Add together all costs related to marketing, advertising, and sales for the selected period.
- Divide by the number of new customers: Divide the expenses by the number of first-time customers acquired during the timeframe.
Here’s is this process expressed as a formula:
CAC = (Total Sales and Marketing Expenses) ÷ (Number of New Customers)
Let’s look at an example. Say a business spends $10,000 on sales and $15,000 on marketing within a quarter and acquires 2,000 new customers. In this scenario, the CAC for the quarter is calculated as follows:
($10,000 + $15,000) ÷ 2,000 = $12.50 per customer.
Best Practices to Decrease Customer Acquisition Cost
Here are some best practices you can use to lower the cost of winning new customers:
Improve Lead Generation
Focusing on high-quality leads can significantly reduce wasted marketing spend that can lead to high acquisition costs. In contrast, well-structured campaigns help you attract prospects who are more likely to become loyal customers.
Optimize the Sales Funnel
Regularly evaluating and adjusting your sales funnel to reduce friction leads to smoother customer journeys and higher conversion rates. Like better lead targeting, when you’re able to convert more of your funnel to customers, CAC can significantly decrease as a result.
Monitor Other Performance Metrics
It’s best to continuously track CAC against other KPIs to identify inefficiency trends throughout the business. Good metrics to monitor include customer lifetime value (CLV), conversion rate, and average order value (AOV). For example, tracking these metrics might reveal that a segment with a high acquisition cost also results in much higher CLV on average. With this information, you can choose to reallocate resources towards this customer group.
Leverage Automation
Using AI to automate your sales processes and customer service operations can help you win more customers. Potential customers benefit from faster and more convenient service while your team enjoys a more efficient workflow. For example, with Rep AI, you can let your AI chat automate all pre-sale questions to seamlessly convert a greater number of web visitors.
