The most dreaded statement the marketing team will hear is that they have spent too much to market the business, although other metrics need to be considered such as product quality, customer service, and business location To determine which costs are incurred when acquiring customers, knowing customer acquisition costs is crucial. This includes both business-to-customer acquisitions and business-to-business acquisitions.
What is Customer Acquisition Cost (CAC)?
CAC is the costs and resources spent to get a new customer. It measures the costs of transforming a prospective client into a consumer. The process of acquiring a customer can be done by the company itself through its internal team. Furthermore, customer acquisition services can be hired from a customer acquisition agency. So, in this case, the money paid to the agency is the customer acquisition cost.
The Formula for CAC
The formula used to calculate CAC is to add up the costs of sales and the costs of marketing then divide them by the number of new customers acquired during a specific time period. CAC formula:
Customer Acquisition Cost=Costs of Sales+Costs of MarketingNo. New Customers Acquired
For instance, if your sales are $10,000 and your marketing costs are $2,000, while the number of customers attained over a set period of time is 200, then:
$10000+$2000200 People=$600 Per a Customer
So, it will cost $600 to acquire one client.
How to Improve CAC
Improving CAC means that the costs to recruit must not negatively affect the profitability of the customer. It means that they are either maintained or reduced while still attracting even more customers.
CAC is reducible by:
- Assessing the customer acquisition agency Fees charged vary from one agency to the other. Most established agencies will charge a lot more than the upstart agencies do. Reputable upcoming agencies are highly likely to offer better results.
- Having a linear marketing team
A smaller and more efficient marketing team will give the best results while reducing the human capital costs.
- Focusing on the business-to-business approach rather than the business-to-customer business model
This approach helps to reduce costs of reaching every customer by selling the goods and services to other businesses, which will reach their clientele easily.
- Focusing on the existing market
It costs a lot of money to break into a new market. In addition, customer acquisition takes some time as one needs to build a relationship and get prospective clients to trust you. Using the customer referral model has proven to have worked wonders among existing customers.
- Change the customer care conversion approach
It’s one thing to get consumers interested in your product or service, and it is another thing to get them to make a purchase. The customer care approach should strive to convert inquiring prospects into real customers.
Why is understanding your CAC so important?
- Understand your market segment
CAC should be reduced as much as possible. Performing CAC analysis on each of its market segments, will help the company gain a true picture of which segments need improvement and by how much. Some segments are quite costly to run. It will then help to determine which marketing approach is working and refining marketing approaches that are not.
- Improve the profit margin
There could be new clients, but if the costs of acquiring them are high, it will hurt the bottom line of the business’ profit. Understanding CAC will help management come up with approaches that will reduce it while boosting profitability.
What do you include in CAC?
There are a number of costs that add up directly to CAC. They can be divided into two: sales costs and marketing costs
- Production expenses
- Inventory expenses
- Sales team expenses
- Advertising expenses
- Creative expenses
- Promotion and marketing team expenses
- Broadcasting expenses
- The number of customers acquired in that period
What to not include in CAC
- Product patenting costs
- Business expansion costs
- Customer compensation costs
- Human capital costs other than for sales and marketing.
- Customer satisfaction costs
Tips to Reduce CAC
There are several different ways to reduce the cost of CAC services while increasing profit.
- Engaging the customer acquisition agency
Agencies offer customer acquisition services that are more specialized than those of your internal marketing team. To reduce costs, contract with the agency on a pay per client recruited basis.
- Avoiding double marketing
Decide whether the agency or the internal marketing team will acquire clients. When both are working towards the same goal, it will cost more as they may both target a similar client at the same time, which wastes resources.
- Improve the customer conversion rate
The faster the conversion of a customer is, the less it will cost.
Quality products and services will require fewer dollars to convert clients.
- Extensive marketing for a specific period
Marketing is a daily activity but should be carried out during a specified period of time, which will reduce the costs.
Customer Acquisition Cost (CAC) FAQ
It is the total of the sales and the marketing costs divided by the number of clients attained in a given period.
- Are customer acquisition costs important?
Yes, they are important. They help you understand what works and what does not work in your business. Therefore, you can plan for the future.
- Which CAC rate is the best?
It depends on the industry your business is in. The most important aspect is that the business makes profits and CAC is one of the parameters.
- What is the difference between CAC and Customer Lifetime Value (CLV)?
CLV looks at the value of maintaining the customer over a period of time while CAC is to get the customer on board.
CAC is valuable to both the company and the investors. To the investors, it helps them to decide if the company has potential profitability in the future. To the company management, it helps them decide on how to strategize to maintain profitability while getting new customers. However, over time it has been found out that to get optimum customer acquisition, services focusing on business-to-business customer acquisition through a customer acquisition agency has worked wonders.
Navi Kang is a 3x entrepreneur and the founder of Northpeak, a growth marketing and conversion rate optimization firm with a data & design-first approach. Prior to Northpeak, Navi was helping startups with growth as an Entrepreneur-in-Residence (EIR) at an early-stage venture capital firm in the Midwest. Navi is currently focused on helping mission-driven leaders and companies create world-class user experiences that increase revenue and ROI. You can connect with him on Twitter and LinkedIn.