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What Is CAC (Customer Acquisition Cost)?
Customer Acquisition Cost (or CAC) is the expense required to obtain a new customer. It can be calculated by dividing the cost of all sales and marketing activities by the number of customers acquired.
CAC is typically used in conjunction with LTV (lifetime value) to gauge how much a new customer costs compared to the total revenue they’re expected to generate.
Why Is CAC Important To Measure?
The details may be different depending on which study you read, but the findings are the same: new customers are expensive, with that expense being the culmination of everything a company does to attract and acquire their business.
The costs associated with bringing in a new customer can include:
- Inventory expenses, including product production and maintenance
- Marketing and advertising spend
- Employee salaries and time
- Infrastructure or technology costs
With all of these costs, the deck may seem stacked against an individual customer. However, many of these are fixed expenses, so the per-customer cost is progressively lessened as more customers are acquired.
CAC is a useful metric to keep track of not necessarily for its own sake, but because it can be contrasted against other metrics to judge the efficiency of your company’s sales and marketing efforts. For example, an inbound marketing strategy might raise a company’s CAC when it is implemented, but could lower the CAC past its initial value over time.
How To Improve Your CAC:
A high CAC relative to the industry average may mean that with every new customer, your company is losing money. While this is not a desirable scenario, there are several things you can try to lower your CAC:
1. Improve your conversion rates
There is a lot of experimentation required to determine the best copy, best colour, and best placement of your CTA buttons, but finding what works can have a tremendous impact on how many people convert. By changing a single word, Unbounce increased free trial signups by 90%.
2. Decrease your reliance on advertising
While advertising creates general awareness, there comes a point where spending more and more money won’t result in more results. Once you’ve exhausted the market your advertising too, the average cost you’ll have to pay for impressions and clicks will go up.
Instead of relying solely on paid media, look for opportunities to win attention and site visitors organically. Whether that’s through content marketing, SEO, earned media, etc—your goal should be to build systems that bring people into the top of your funnel without you having to pay for each and every person.
3. Highlight your value proposition
How are you different from your competitors?
What are you doing that others in your industry aren’t?
Where are you providing extra value to customers?
Trying to appeal to everyone may generate a lot of attention and potential customers, but the majority of them will be low quality. Clarifying your value proposition can help you secure higher-quality prospects.
4. Invest in marketing automation.
Much as with inbound marketing, marketing automation software can be a big expense initially, but one that can have a large payoff down the road.
Automating your marketing processes is not only a good way to nurture potential customers, it also ensures that there is constant communication from your company to them. While the messaging still needs to be crafted, sending a personalized email to dozens of prospects with one click can dramatically reduce employee time spent on marketing.
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