Customer acquisition cost (CAC) is defined as the cost associated with convincing a customer to purchase. This is very important for companies wishing to maximize their marketing effectiveness. For instance, a benefit of understanding your CAC and how your process influences it can allow your organization to optimize its marketing effectiveness.
This post will discuss what costs are directed to customer acquisition, calculating CAC, and finally, some recommendations to optimize CAC results.
Cost related to acquisitions
Firstly, it’s important to clarify that all costs related to the CAC calculations are marketing and sales expenses. For example, social media ads spend on generating awareness, content production costs, and sales materials.
Another important analysis that marketing and sales must do is an attribution analysis of what expenditures were more effective in driving revenue. For that, I recommend visiting this link on marketing attribution. In conclusion, understanding attribution will be important when optimizing marketing expenditure or if cost reductions are needed knowing what to protect and what can be sacrificed.
How to calculate customer acquisition cost
The formula to calculate is simple. First, take the amount spent during the period and divide it by the number of customers acquired. For instance, if expenses were 40,000 USD and generated 1,000 new customers, the CAC will be 40usd.
Optimizing customer acquisition cost
To conclude, the CAC is an important metric when evaluating your marketing and sales efforts’ effectiveness. Therefore, once you understand the amount of expenditure (and what channels or campaigns are involved) and the number of customers that you have generated and have your CAC, then you must continuously look to improvise. Some tips to be successful are:
- Firstly, have a monthly control of your CAC to evaluate your evolution across time. Take seasonality into consideration for your analysis!
- Secondly, perform AB testing on digital marketing campaigns on social media and email. For example, you can maximize spending on the best-performing messages.
- Finally, collect customer feedback. For example, by using surveys or interviewing customers, you can understand what worked best.
Finally, your CAC must make business sense above all. For instance, if the CAC is higher than your margins, it could be problematic. Analysis to evaluate profitability is to use the expected lifetime value for your customers (amount of purchases x average purchase expected) and compares the margins out of CLV with your CAC. Even if your first sale is not profitable, if you have a product that will have multiple purchases like a subscription, it might make business sense. Think of those 30 days free subscriptions as an example!
I hope you enjoyed this post. If you liked this content, please check out my last post on omnichannel marketing.