Customer Acquisition Cost (CAC) may not be the most popular business metrics. However, it is worth your attention. CAC shows how much your company spends on acquiring each new customer. If you seek to save up some money and allocate resources wisely, you need to be aware of your CAC. Don’t know how to calculate this parameter? This article will answer all your questions and help you reduce CAC to prevent useless spending.
In simple words, CAC is the money you spend to convert a potential client into the actual one. There is one golden rule with CAC that explains its value: it should always be lower than the lifetime value (LTV). The latter term is the amount of money your company will earn from each client. For example, if a person was your client for five years and spent $1,000 annually, their LTV is $5,000. You should have spent less than $5,000 on drawing this client to your company to make a profit. Pretty simple, huh?
Thus, CAC shows the efficiency of marketing strategies. If you do a great job advertising your company and attracting new clients, your CAC remains low. Of course, you should not overlook the role of organic traffic. Some clients come from unpaid sources or find your company accidentally. However, you cannot control this measure, so there is no use in taking it into consideration when designing your marketing strategies. With CAC, all that matters is how much you spend on credits, referral fees, discounts, etc.
How Should I Measure CAC for My Company?
Calculating CAC is simple if you have basic business analytics. All you need is to know how many new customers you gained in a given time period and how much you spent on marketing for the same period. Divide the total spent on attracting customers by the number of new clients. Here you are – your CAC is ready! As you can see, you don’t have to be a math genius to measure CAC for your business.
For example, you spent $45,000 on marketing strategies in three months. The number of new clients for this period reached 1,000. It means that your CAC is $45. If each of your clients brings more money, you are doing fine.
However, you must remember some important nuances. For example, your company offers a SaaS free trial for two weeks. It means that it takes at least 14 days for new clients to become your loyal clientele. Thus, 1,000 new customers in three months may be the result of your marketing efforts in previous months. If your product or service has a long conversion funnel, CAC calculations may become a bit more challenging.
What about the old clients who return? How to consider them in CAC measurements? If you conducted re-engagement campaigns, it makes sense to include their cost in the sales and marketing costs. However, your CAC may not be very accurate if you go this way. For more precise measurements, you need to differentiate between customers. Determine CAC for new customers separately from CAC for returning ones. Thus, you will see the value of customer re-engagement, which is cheaper than seeking new clients.
The best thing about CAC is that it can help find the most effective marketing strategies. Calculate CAC separately for each one (e.g., paid social media ads). Compare the results and see which one brings more customers at the lowest cost. Prioritizing this strategy in the future will help you allocate financial resources wisely.
So, you aim to reduce CAC as much as possible. There is no universal strategy to cut CAC, but you can choose from many options or combine them. For example, you can focus on enhancing user value. Give customers something impressive, valuable, and memorable. Interest them and highlight your uniqueness. One of the ways to do it is to invest in UI and UX design services. For instance, appealing SaaS web design will help you stand out from competitors and draw new clients.
You may also want to improve onboarding. Find ways to engage new customers as soon as possible. Educate them about the product, offer free trials, and do whatever it takes for clients to click on the “buy” button. Product engagement should occur instantly for CAC to be cheaper.
Reduce CAC by dropping useless marketing strategies. You may genuinely believe in the power of social media. However, if paid ads on Instagram do not bring many clients, switch to more lucrative options. Do not expect the situation to improve by itself. Act as soon as possible to get optimal results.
Finally, take advantage of customer relationship management (CRM). Manage company-client relationships by tracking all interactions with customers. You need to know about your existing and potential clients as much as possible. What do they do? How do they use your services? How much does it take for them to subscribe? The more data you have, the more informed marketing decisions you can make. Thus, your customer acquisition will be more meaningful.
Other strategies you may find useful:
- Increase repeat customer rates
- Use customer feedback loops
- Cut churn rates
- Create meaningful content
- Conduct A/B testing
Measuring CAC makes your marketing strategies more purposeful. Don’t overlook this metric because it helps you learn more about your clients and their needs. If you put a bit of effort into cutting CAC, you may notice a steady increase in revenues over time.