CAC Marketing: Customer Acquisition Cost Formula and Why it is Vital
In today’s competitive business environment, organizations are constantly looking for ways to generate more leads and obtain higher customer conversion rates. However, trying to acquire new customers at ‘any’ cost is entirely wrong.
Marketers realize that there is a cost behind every action conducted within a certain environment or framework – CAC (Customer Acquisition Cost), being one of the most prominent out of all marketing or sales costs.
Definition of CAC
The simplest definition of CAC is the cost a business incurs when acquiring new customers. This value is determined by calculating the total cost of all marketing and sales elements and dividing that number by the number of new customers acquired.
This should not be confused with cost per action (CPA), as CPA is the cost that you incur to make a sale for both new, existing, and returning customers. Instead, CAC is solely related to the acquisition of new customers.
Customer Acquisition Cost Formula – How to calculate CAC?
There are two methods to calculate the customer cost of acquisition:
- Simple Method
- Complex Method
Here is how the Customer Acquisition Cost formula is calculated using the simple method:
CAC= Total Marketing Costs / New Customers Acquired
As far as the complex method is concerned, additional costs are taken into account, such as campaigns, programs, salaries, commissions, and all other fixed or variable overhead costs incurred to acquire a new customer. The complex method looks something like this:
In this method, all relevant costs are first calculated to know the exact CAC during a certain timeframe. As a marketer, you might want to revisit and reduce costs related to a specific project or campaign. Taking into consideration the various factors of the CAC metric, you might be able to detect and optimize those costs individually.
Total Ad Spend
This is the total budget of a certain ad campaign that you go ahead with. In the digital arena, this is the amount that you spend on all digital channels and touchpoints to promote your product or brand. If one or more campaigns is not returning the value that you expect, you can always reinvest money in areas that yield better returns.
With all the new business automation techniques and models being adopted by organizations worldwide, it might be a good idea to analyze and detect areas where you might be able to reduce operational costs by implementing an automated model. The use of chatbots these days is a prime example of this.
These are all costs that you, as a business entity, incur, which are primarily related to technical aspects of your campaigns. For example, the software and tools that your employees use for a certain campaign will fall under this category.
Cost of Acquiring a Customer – Why It Matters?
For businesses and marketers today, knowing the cost of customer acquisition has become imperative. No business owner wants to keep on spending advertising budgets on campaigns that are not yielding a good CAC value.
In addition to this, both investors and companies can benefit from the CAC metric in the long run. Investors are interested to know the profitability of a company by analyzing the scope of a certain product or service. They measure the scalability of the entire campaign, product, or brand using these calculations. On the other hand, companies and marketers are keen to know the costs involved in a certain marketing campaign and how these campaigns can be optimized. If the CAC cost can be reduced, this would directly result in maximizing profits.
CAC Comparison with LTV
Having visibility on the cost of acquiring a customer is useful for marketers. However, using it along with the Lifetime Value of a Customer (LTV) makes it even more effective while trying to gauge the overall value and cost of customer acquisition.
LTV is the estimated revenue that a customer will yield for a business over a specific period. CAC marketing models are usually used in combination with the LTV to give a clearer picture of marketing and advertising and what areas can be focused on to give better results. If your LTV:CAC ratio is:
- Less than 1:1 – things are going haywire, and you need to take immediate action before it gets worse.
- 1:1 – for every new customer, you are losing money.
- 3:1 – this is the ideal ratio that marketers look to achieve. All of your marketing campaigns are working effectively.
- Greater than 3:1 – this is good; however, there is more room to invest and grow your business. Initiate new campaigns or make your current ones more aggressive in order to bring this ratio down to 3:1.
Customer Cost of Acquisition By Industry
The LTV to CAC ratio should ideally be 3:1, but how do you know what a good CAC is as per your business model? Well, the ideal CAC numbers vary from one industry to another. According to a publication, the estimated CAC values per industry are as follows:
- Travel: $7
- Retail: $10
- Financial: $175
- Manufacturing: $83
- Transportation: $98
- Technology (Hardware): $182
- Real Estate: $213
- Consumer Goods: $22
- Banking/Insurance: $303
- Marketing Agency: $141
If your business falls under one of these industries and your CAC is close to the number mentioned, you are doing pretty well.
How to Improve Your CAC
If you believe that your cost of acquiring a customer is not what it should be in comparison with another marketing campaign or even your competitor’s product, you might want to revisit one of the following areas that may play a vital role in your CAC value:
- Customer Referral Program – If one of your existing customers refers to your brand or product to someone who was already interested in buying it, his/her CAC would be calculated once they convert. Customers with ‘0’ CAC will negatively affect your numbers in the long run. It is always a good idea to come up with customer referral programs so you can better organize your database.
- On-Site Conversions – If your website landing page is not what it should be, or it is taking too long for your page to load on desktop or mobile, then it is likely you will have a lower on-site conversion rate – and this will directly impact your CAC value. Improving these factors will improve your CAC as well.
- Customer Feedback – Knowing what your potential or existing customers think about your brand or the way you are reaching out to them, plays an integral part not only to CAC but to other marketing channels as well. Try to collect as much feedback as you possibly can through digital and non-digital means so that future customer journeys and visits can be improved.
- Implement Better CRMs – In today’s digital environment, all businesses have a CRM tool or software installed where they can gauge the influx of all leads during a specific time span. Make sure you have the best CRM tool implemented that can give you all the effective user insights, such as email lists, loyalty programs, limited time offers and deals, blogs & articles, etc.
Final Thoughts on Customer Acquisition Cost (CAC)
With all the marketing tools, techniques, models, and software at the disposal of marketers today, it is still not a walk in the park when it comes to knowing the CAC and ways to make it better on a continual basis. Even if you know how to calculate customer acquisition costs, there will still be areas where your other marketing campaigns or your competitor product might be doing better just because of factors that directly affect the CAC value.
The better the CAC value for a longer period of time, the better the chance of your marketing campaigns performing well across all marketing, advertising, and digital outlets.