CAC or customer acquisition cost is the cost incurred by the business in order to gain a new customer. This takes into account the complete cost linked with marketing and sales to grab the potential customer and influence them for procurement.
Companies across the globe use CAC as its a significant term in business. The resources mandatory to attract a customer and to flourish in business, CAC is required. It is important to get in-depth with CAC if you desire to enhance your customer base and reap the profit.
The conversion of potential lead to a customer is measured by customer acquisition cost (CAC). This metric is utilized mainly by businesses to know the profitability as it equates the cost spent on acquiring the customers to the customers they gained.
When this value is reduced, it shows that the business is spending an efficient way and enhanced return is to be found in the total profit. After learning about CAC, there are ways to calculate CAC.
Calculating CAC:
In order to find CAC, the average CAC must be calculated or for a particular acquisition method, the CAC must be calculated. The period time must be picked first in order to find the overall CAC.
For this period, the customer acquisition amount spent must be divided by the customers gained in the same period. The average cost to obtain a single customer will be the result.
CAC= Amount spent on marketing and sales/ Number of customers:
The cost of marketing and sales are the expenses for employee salaries, Ad spends, publishing cost, creative costs, production, technical cost, and inventory upkeep and management time.
When CAC for content marketing or CAC is to be determined, similar steps are to be followed but the amount being spent for a particular acquisition method is divided by the customers gained in. When this calculation is done for every marketing channel, the amount spent on gaining a customer can be obtained.
CAC Calculating with an example:
The time period for evaluation is to be determined first in order to calculate customer acquisition cost. For example, your organization spends $300K on marketing and $500K on sales and has generated about 800 new customers for the year. The CAC for your organization can be calculated as $500K+$300K/800=1K. With the CAC of your organization, you can make a comparison with other key business metrics. By this way, many significant insights about sales, marketing, and customer service campaigns can be uncovered.
Reducing CAC:
When successful inbound marketing programs are on, there isn’t a need for enhanced resources to ad spend. When your blog has the capability to bring in enhanced quality leads throughout the day, then resources for ads can be minimized. The sales team has the responsibility and if they hold a healthy relationship with the customers, CAC can be reduced.
Finally, if the customers are able to sustain or cultivate a relationship with other customers, then new customers are generated. As successful customers write reviews, testimonials, tell others about it, and make case studies so that new customers are generated. By this way, customers are gained free of charge and CAC is reduced.
- CAC can also be reduced with simple product design. This helps the customers to understand the service easily and they can self-serve. By this way, CAC can be reduced.
- Businesses can follow cost-effective ways, for example, inbound marketing to get customers. This can reduce CAC.
- After sign-ups, enhanced conversations can be initiated for reduced CAC.
CAC can be reduced by implementing the above-mentioned ways. Before this, the CAC for every channel must be calculated.
CAC for Every Marketing Channel:
All marketers must be aware of the CAC for every marketing channel. When the lowest CAC for any channel is detected, your marketing spends can be planned. For lower CAC channels more budgets must be allotted. For a fixed amount budget, more customers can be gained. Gather all details for a month, quarter or year in a spreadsheet as per channels and add the amount. Facebook advertising amounts, as well as Google Ad words amount, can be summed up. Such channels can be placed under Pay per click or PPC. Then you can sum up the amounts spent on blogging and SEO and this can be placed under inbound marketing costs.
Now you have a clear picture of the amount spent on every channel. Here a simple formula can be used to find out the customer obtained by each channel. This can be considered as an averaging method. By this way, both the useless and the best marketing channel can be identified.
When e-commerce companies that sell products are considered, the conversation that trails the advertisement platform helps to know the direct sales of pay per click advertisements. By this way, the value can be determined and penned down in the spreadsheet. You can also find out the way pay per click works when made a comparison with other marketing spends. Also paying customers can be got back to their attribution source by means of tools. To make it clear, your customers last visited channel by the time, the initial purchase with the organization can be found.
The true fact is that every marketing channel assists the other channel. For example, your blogs posts would support pay per click ads, etc. Almost all channels work to bring together the number of customers. Also, outdoor advertising works for the same. Finally, the result is customer acquisition.
Improving Customer Acquisition Cost (CAC):
The CAC in any business can be enhanced by the following methods.
1. On-site conversion metrics improvement:
Goals may be established on Google analytics and perform split testing A/B. This can be carried over with a new check out system so that the shopping cart rejection rate can be reduced and mobile optimization, site speed, landing page, etc. can be enhanced. Many other factors can also be concentrated so that the sites overall performance can be enhanced.
2. CRM or Customer relationship management to be implemented:
When successful companies are considered, they do have repeated buyers. Some form of CRM is implemented in these organizations. To implement a CRM, sales team employs an automated email list, a sales tracking system that is cloud-based, loyalty programs, blogs, and other methods in order to get hold of loyal customers.
3. Conversion rate optimization:
For visitors to get transformed into leads, it must be straight forward and simple. This simplicity would help change leads to customers and go on for purchasing. The site must be optimized for shopping and mobile form submission. Also, remember to create a touchless sales process, in this way purchase can be made 24/7.
4. User value enhancement:
The term user value is when certain aspects that are pleasing to the users are made. This can be anything such as qualities that customers requested, or additional values, etc. You can also implement certain aspects to enhance the position of the product. You can also find better ways to get money from present customers.
5. Customer referral program:
While customer’s assists in obtaining good leads for ones who desire to learn about your service or product, a $0 CAC will be generated. Your CAC will be lowered by these free customers. Hence the customer referral program can be implemented.
6. To optimize as well as improve CAC, there are many things that should be tried such as focusing campaigns, on-site conversion, finding profitable, new channels, messaging in campaigns, etc. You should also concentrate on your visit to purchase rate for a channel, cost per visit of the channel, and customer’s average value converted from a specific channel.
7. It is good to offer a customer that’s required by them. In order to make your customers stick around longer, collect feedback from customers, do your best for them whether it’s a product fix, product offering, etc.
Getting to know the cost per acquisition (CPA) and customer acquisition cost (CAC)
As discussed above customer acquisition cost (CAC) is the amount spent on gaining a paying customer. Cost per acquisition (CPA) is the amount spent on gaining a non-paying customer. It is mandatory for every business to know both these metrics. The CAC is one that measures the money source of the organization. The CPA is one that deals with users who are non-payers but support money source. For more details about CPA and CAC
- CPA is measured when a user signs up for free Netflix for a month. Once the user pays after free version, he is measured as CAC.
- The user is measured with CPA if he or she is a Facebook user. They fall under CAC measurement if they are a Facebook advertiser.
- The user will fall under CPA when they make an e-commerce account online without any purchase. After making a purchase, the user is measured with CAC.
When e-commerce businesses are considered, the CAC is more significant than CPA. The e-commerce companies gain data such as the number of users converted from registered to pay with CPA. But remember it is CAC that offers cost acquired for obtaining a paying customer and this is important.
Is CAC important?
The success of any business is measured with customer acquisition cost. When the customer lifetime value (LTV) is less and CAC is more, then the business is not towards success. For example, if the CAC of a company is $75 and the LTV is $70, though the company can be a famed one across the globe, the organization is hopeless if the above metrics aren’t changed. There are many businesses online that has not estimated the LTV and CAC of their organization. It is significant to compare and get to know LTV and CAC metrics to understand the revenue growth of the organization.
Example of LTV and CAC:
Consider for example two companies, A and B. The LTV of organization A is $40 and LTV of organization B is $400. In order to gain a customer organization, A spends $10 and B spends $200.
Hence organization A has CAC=$10 and LTV=$40
The CAC: LTV=1:4
Organization B has CAC =$200 and LTV= $400
The CAC: LTV= 1:2
This shows that for a customer organization B makes $200 and organization A makes $30. The CAC, LTV ratio clears represents that company B will boost twice in a quick manner. Individual campaigns and channels can be examined with this ratio. For every marketing channel, the CAC can be calculated and can find out the affordable customers from. Also, the most valuable customers can be known by combining with LTV.
Requirements for calculating LTV:
The customer lifetime value (LTV) is important to calculate the customer acquisition cost (CAC). The projected revenue to be generated by a customer while they are associated with the company is found with LTV. In order to know the LTV, the following variables are required.
- Customer value: The average purchase value is multiplied by the average purchase frequency for obtaining this number.
- The Average purchase value: The total revenue of an organization in a certain time period is divided by the number of purchases made over a specific time.
- Average purchase frequency: The number of purchases over a particular period of time is divided by the unique customer during that time and this is called average purchase frequency.
- The Average customer lifespan: This parameter is calculated by an average obtained from the customers who continuously purchase from the company.
The LTV is calculated by multiplying the average customer life span with customer value. From this, you can gain a clear picture of the revenue to be expected from an average customer from the organization. It is by this way the LTV: CAC, as mentioned above, is calculated.
Conclusion:
These are a few important aspects to keep in while monitoring Customer acquisition cost. CAC is significant in a business and the above-mentioned parameters must be implemented and monitored for a successful business. For entrepreneurs who are starting a new business, they need to understand CAC and has to work in different ways to reduce CAC. For any business to move over with a healthy start, should possess a lower CAC than the customer monetization value.