CAC, or also referred to as customer acquisition cost, is a business level KPI metric that is used by companies to assess the costs associated with acquiring new customers. The CAC metric calculates the amount of monetary resources that are required to acquire a single paying customer. If you want your business to grow it’s underlying customer base and remain profitable, it’s important to know how to accurately measure your CAC and also control it.
In this article we will discuss all the important factors associated with the customer acquisition cost such as:
Let’s dive right in.
Customer Acquisition Cost is a KPI metric that is used by businesses to access the cost that is associated with acquiring a paying customer. Business managers rely on this metric in order to measure their marketing costs, determine their profitability, and assess the effectiveness of their marketing and advertising efforts.
The CAC is a value that managers and businesses need to know in order to be able to grow their client base and sales revenue. Businesses often look for ways to reduce their customer acquisition costs in order to improve their profitability.
If your business relies heavily on leads, this metric becomes even more vital to know and control for your business. For example, if you own an insurance agency you need a steady flow of leads to come in that you turn into paying customers. As a result it’s important that you have an effective method for tracking your leads costs and your customer acquisition costs. Getting a lead is one cost, converting that lead into a paying customer is a separate cost.
If you want to learn how to control and lower your CAC, you first have to know how to accurately calculate.
The customer acquisition cost is calculated by:
CAC = Cost of Sales and Marketing / Number of New Paying Customers Acquired
If you aren’t sure what to include in your sales and marketing costs take a look at the next portion below which outlines some of the most common customer acquisition costs.
Some businesses choose not to include certain costs as part of their customer acquisition costs for a wide variety of reasons. Some of them simply don’t want to come to terms with the true cost of acquiring customers which tends to be much higher than they actually think. It’s good to be extremely honest about your customer acquisitions costs in order to reduce them and improve your company’s profitability. The most common costs associated with customer acquisition are broken by the cost of sales and cost of marketing.
The cost of sales are the direct costs that are associated with either the production of goods or the supply of service by your business. It’s worth noting that these costs will tend to vary between different types of businesses. Some common costs of sales include:
The cost of sales tends to be variable from period to period and as a business it’s important to know how much they weigh on the overall cost of acquiring customers.
If you are a service level business and you have salespeople who do a good job of closing, they are in one way or another impacting your overall customer acquisition cost. If you happen to be a business which sells physical products you can find ways to reduce your production costs in order to improve your bottom line.
The cost of marketing covers all the necessary costs that are associated with marketing and advertising products and services and also the cost to acquire leads. Most businesses typically have a period marketing budget in place that they follow and adjust as their sales increase and decrease.
Some companies even perform periodic marketing audits in order to access their marketing performance and adjust as necessary.
Recommended Reading: Conducting a Marketing Audit
Some of the most common costs of marketing include:
In order to accurately measure your marketing costs it’s important to breakdown each one into their own relevant category and rank them based on the total amounts spent in each category. This is done in order to know which component of your marketing carries the most cost and which component is the most effective in helping you to generate leads.
Calculating your customer acquisition cost can be done in a 3 simple step process. Once you have calculated your CAC for your business it’s important to track this value for each period and compare it against other KPI metrics that are useful to your business.
Doing this periodically will help you learn more about your business operations and how you can improve your marketing and sales in order to reduce your CAC and improve your company's profitability.
Let’s take a look at the 3 steps below.
The first step towards calculating your CAC is to determine the time period for which you want to keep track of. Each company is different and for smaller companies it makes more sense to keep an eye on their CAC for a smaller time period such as bi-weekly or monthly.
Companies of scale can choose to access their CAC on a quarterly basis. It all depends on the size of your company and the sensitivity of cost on your business.
The second step is a bit involved because it requires you to first break down all your relevant sales and marketing costs together. In order to do this effectively you have to have good bookkeeping procedures and really know what you consider as costs for your business.
It’s important to be honest and transparent in this step because it will help you understand your business that much more.
Once you have decided on your time period and have summarized your total sales and marketing costs it’s time to divide them by the total number of new customers you acquired for your chosen timer period.
As previously mentioned, once you have this figure it’s important to keep a close eye on it and start focusing on ways to improve it.
It’s more than obvious that CAC will vary widely by different industries and business types. It will also vary depending on the type of marketing and advertising strategy that is used by companies. As a result it’s first important to have a good idea of the average CAC in different industries.
As you can see some of these costs are quite shocking. This simply reiterates the point on why tracking your CAC cost is so important. It’s simply expensive to acquire new paying customers and knowing which marketing sources are converting you paying clients is extremely critical in running a profitable business.