There are two critical metrics that every business leader should be tracking to assess the effectiveness of their customer acquisition strategies and tactics:
- Customer Acquisition Cost
- Customer Lifetime Value
What is Customer Acquisition Cost?
Custom Acquisition Cost (CAC) is the total of all expenses incurred in acquiring a new customer and includes marketing and sales expenses.
How can CAC Can Help You Lead Your Custom Acquisition Strategy More Effectively?
Knowing the CAC of your organization will help you make better strategic decisions by:
- Identifying the most cost-effective marketing channels. CAC can help small businesses determine which marketing channels are most effective at driving new customers. By tracking CAC across different channels, businesses can identify the channels that are generating the most customers at the lowest cost. This information can then be used to allocate marketing resources more efficiently.
- Improving the ROI of marketing campaigns. CAC can also be used to improve the ROI of marketing campaigns. By comparing CAC to revenue generated from each campaign, businesses can determine which campaigns are profitable and which ones are not. This information can then be used to optimize campaigns and improve their performance.
- Setting realistic growth goals. CAC can also be used to set realistic growth goals. By understanding how much it costs to acquire a new customer, businesses can better forecast how much they need to spend on marketing to achieve their desired growth targets.
Customer Acquisition Cost Formula
To calculate CAC, you need to gather and track all of the expenses associated with customer acquisition over a specific period of time. These expenses include:
- Advertising expenses
- Marketing campaign costs
- Salaries and commissions for sales and marketing teams
- Technology and software expenses
- External agency fees
Once you have gathered all the relevant expenses, you can use the following formula to calculate CAC:
CAC = Marketing Expenses + Sales Expenses / Total New Customers
How to Reduce Customer Acquisition Cost
There are several ways to reduce CAC, such as:
- Leverage Quality Data: Set up data collection tools to help you assess the leads generated from your marketing efforts, how much you are spending for each lead, and the conversion ratio of leads to prospects to customers.
- Targeting the right audience with your marketing campaigns. If you’re targeting the wrong audience, you will waste a lot of money on marketing campaigns that don’t produce results. Access to quality data will help you target the right audience faster and more accurately.
- Creating high-quality content that attracts and engages potential customers. Good content will help you attract potential customers to your website and convert them into leads and customers.
- Givers Gain. Offering a free trial or demo of your product or service is a great way to give potential customers a chance to try your product or service before they buy it.
- Make it easy for potential customers to convert into paying customers. Your website should be easy to navigate, and your checkout process should be quick and painless.
Practical Examples of How to Use CAC
- A person who has a side hustle selling handmade jewelry on Etsy might use CAC data to determine which social media platforms are most effective at driving traffic to her store. She might find that Facebook ads are generating a lot of traffic, but her CAC for Facebook ads is higher than for Instagram ads. She could then decide to reallocate some of her marketing budget from Facebook to Instagram.
- A small business owner running a lawn care service might use CAC data to determine which marketing channels are most effective at generating new customers. He might find that direct mail postcards are generating a lot of leads, but his CAC for direct mail is higher than for Google Ads leads. He could then decide to spend more of his marketing budget on Google Ads.
- An entrepreneur selling software might use CAC data to determine the most profitable pricing tiers. He might find that his low-tier pricing plan is generating a lot of customers, but his CAC for low-tier customers is higher than for high-tier customers. He could then decide to raise the price of his low-tier plan or to offer more incentives to high-tier customers.
Conclusion
Customer Acquisition Cost is an important metric for all businesses to track, but it is essential for small businesses focused on growing their company by acquiring new customers. Tracking your CAC and taking steps to reduce it will help improve the profitability of your business and lay the foundation for long-term growth.