What does Customer Acquisition Cost mean?
Background
Unlike in the olden days, brands today have the ammunition to track their marketing expenditure using different metrics to make informed decisions. Since customers are an integral part of a business (at least a profitable one), acquiring them becomes critical. The more customers, the merrier your state of affairs. Lucky for us, digital marketing has made it possible to measure the amount spent on getting new customers.
Meaning
This amount (spent on getting new customers) is called Customer Acquisition Cost or CAC, as it is more popularly known in marketing circles. Now, you must be wondering why you should care about it, how CAC is calculated, and, more importantly, how it affects your business. Let’s break it down.
CAC represents the cost of hunting leads and converting them to paying customers. It includes several expenses like ads, sales, content, marketing publishing, and design, among others. The calculation of CAC can be pretty complex, which is why companies calculate it annually or quarterly. The marketing and sales teams jointly share this responsibility.
What are the types of CAC?
There are two kinds of CAC- Blended and Paid.
- Paid or Channelised CAC is the total marketing spend/paid customers.
- Blended CAC is the total marketing spend / paid and organic customers.
How do I calculate Customer Acquisition Cost?
Here is the formula:
Money spent on acquiring users/total no. of users acquired.
So assume that your total marketing spend is $100. You have 10 paid customers and 40 organic customers.
Your paid CAC would be $100/10 paid customers = $10 per customer
Your blended CAC would be $100/(10 paid + 40 organic customers) = $2 per customer
Why is Customer Acquisition Cost (CAC) important?
Now that you understand CAC, here’s why you should care about it. It is valuable for tracking the viability of your customer acquisition strategy and adjusting it over time. It is also a meaningful parameter for potential investors, allowing them to evaluate the scalability of your business.
Imagine you are the founder of a company.
You’re at a fundraiser celebrating your Series-A when an interested party walks up to you and utters the three fateful words dreaded/desired by any entrepreneur – “Are you profitable?”
Understanding CAC is necessary to predict how successful your business could be in the future. Building a healthy business ensures you earn more money from customers in their lifetime than you spend on acquiring them.
Knowing a customer’s potential purchasing power lets us decide our acceptable level of CAC per customer. Companies that do not scrutinize their CAC can bleed their way to failure. It’s a metric directly proportional to sales and indispensable to ensuring that your business is cash efficient so it doesn’t crash and burn.
How do I calculate Customer Acquisition Cost?
Can your CAC be improved? Absolutely. How? Through intelligent optimization.
Let’s look at some of the ways your CAC can be influenced.
- Marketing Automation
Reducing manual labor from marketing tasks significantly reduces CAC in tandem with enterprise management tools. Marketing automation already cuts costs because fewer staff members need to focus on menial tasks.
- A/B Testing
It is imperative that marketers split test and optimize different parts of their websites or apps to identify a winning combination for their target audience. Better UX mixed with better targeting leads to increased sales.
- Customer Retention
Did you know that 80% of your profits come from 20% of your customers? Moreover, getting a new customer can cost 5x more than retaining one. Improving customer retention can trigger a 25%-95% increase in profit and is an airtight way to keep your CAC at bay or lower it.
- Segmentation
Knowing the right audiences and targeting those cohorts mitigates the wastage of resources. Segmenting your demographic also helps you learn about their aspirations, identify ideal channels and devise suitable strategies.
- Content
Creating riveting content goes a long way, even beyond your offerings. Your content can be proprietary or user generated. They’re equally effective and popular. Constant content means increased engagement with your audience, better trust building, and more brand resonance.
Now that you are armed with a working knowledge of CAC, you can confidently get started in digital marketing to see how companies are harnessing CAC. Actually, we got you covered. To learn more about how real companies use the above strategies to reduce their CAC, read this case study on HNAK, a leading e-commerce brand.
Conclusion
Simply put, customer acquisition cost is how much an organization spends on getting new customers. CAC is an important metric that can improve a company’s marketing return on investment, profitability, and scalability and strengthen its appeal to external stakeholders like potential investors and analysts.
