What is CAC

What is CAC, and how to calculate it?

What is CAC?

Customer acquisition cost (CAC) is a key performance indicator (KPI) representing how much money an organization spends on attracting and retaining each customer or client.

In other words, it is the cost of sales divided by the number of customers acquired for an advertising campaign.

It’s essential to calculate CAC because it indicates:

  • The costs associated with bringing in new customers to the supply side.
  • Gives insight into the precision of acquisition activity
  • Determines if a company’s customer base is growing or declining.
  • It can help an organization better understand how much it should spend on each customer.

Now how do you calculate the CAC?

CAC doodle

The formula

CAC = (Money spent on advertising) ÷ (Number of customers gained through the campaign.)

For example, if you’ve sent out an email campaign with a CPC (cost per click) of $5 and you receive 100 clicks, your CAC would be ($5 ÷ 100), or $0.50.

Remember, CAC is a KPI. As such, you should use it within the context of other KPIs. It’s important to interpret your data-it doesn’t tell you everything about your campaign. It will require some analysis on your part before determining if there are ways to improve your campaigns.

Why is knowing the CAC so important?

Let’s say you’re running three different ad campaigns, each of which brought in the same amount of customers (15). When you don’t know the customer acquisition cost for each campaign, you may think all three campaigns were equally successful.

But if the first campaign’s customer acquisition cost was $100 for each customer. And the second and third cost $10 and $5.

You realize that Campaign 1 is much less efficient at bringing in customers. It costs more to get five customers than it does to get 10.

Knowing this information can help you decide where to spend your advertising dollars more efficiently.

Other important things to remember:

CAC is a valuable metric for understanding how effective a campaign has been at attracting new customers, but it should not be used as the only indicator of success. For example, suppose you have a few relatively expensive campaigns and brought in a large number of customers. In that case, they might look more successful than an extensive, inexpensive campaign that had less impact.

CAC is a valuable metric for understanding how effective a campaign has been at attracting new customers, but it should not be used as the only indicator of success. #CAC Click To Tweet

What is the average CAC?

Not every business has the exact customer acquisition cost – it varies according to the industry. If you’re in the B2B sector or B2C sector, it will be different. So to know the average CAC for your industry, you need to do a little investigation. Below I listed the CAC for some of the biggest industries.

  • Travel: $7
  • Marketing Agency: $141
  • Consumer Goods: $22
  • Technology (Software): $395
  • Transportation: $98
  • Financial: $175
  • Technology (Hardware): $182
  • Real Estate: $213
  • Retail: $10
  • Banking/Insurance: $303
  • Telecom: $315
  • Manufacturing: $83

Source:

How to reduce the customer acquisition cost?

There are several techniques you can use to reduce CAC. Here are a few of them:

1- Decrease your CPC.

Cost per click is what you pay for each ad click. Paying a lower CPC means a higher CTR (click-through rate). And if you have a high CTR, you get more visitors for the same budget. More visitors means more chances of converting them into leads and sales. In other words, reducing your CPC will lower your CPA. So keep A/B testing your ad creatives and ad copy to get the best CPC.

2- Increase the number of repeat customers and referrals you get from existing ones.

This way, you won’t have to reach out to new customers every time they need something. If your clients like doing business with you, they’ll make referrals and recommend new customers on their own. So setting up a referral campaign or an affiliate program may be a good idea for your company.

3- Increase urgency.

People are more likely to convert into customers if they sense there’s a limited supply. Offering discounts for a certain period or creating an urgency timer on your site will push people looking to buy to convert sooner before it’s too late.

4- Increase your conversion rate.

You can reduce CAC by increasing the percentage of visitors that result in an actual sale or purchase.

For instance, let’s say your CAC is $100, and your average sale is worth $50. If you can increase your conversion rate by 10%, it would reduce the number of leads needed to make a sale from 100 to 90 resulting in an initial decrease in the customer acquisition cost of 10%.

5- Decrease the number of customer touchpoints.

You might lose a lot of potential customers during your way-too-long conversion path. You can increase your conversion rate by reducing the number of steps for a customer to become an actual sale. So you have to find ways to involve potential customers at each step of the sales funnel, so they don’t drop out somewhere in between.

One way is to create a dedicated landing page or microsite where you collect relevant information about your visitors and send them the rest of the way with specific instructions.

Why is knowing your customer lifetime value important?

Knowing the value of a customer beyond their initial purchase is an essential step in evaluating your CAC and LTV. When you have this information, you’ll be able to measure a new customer’s profitability accurately.

Then what seemed to be a losing campaign at first may actually be successful if you have high LTV. You might even conclude that you can spend more to acquire a customer.

It’s vital to have a clear understanding of your customer lifetime value, so you know whether or not the cost of acquiring a new client is justified. Knowing your LTV will help you make better business decisions in the future.

It's vital to have a clear understanding of your customer lifetime value, so you know whether or not the cost of acquiring a new client is justified. #CAC Click To Tweet

Conclusion:

In summary, knowing how much it costs to get a new customer is very important in all industries because it helps you understand whether or not your advertising campaign could potentially be profitable.

It also enables you to quickly explain the return-on-investment of any marketing strategy to potential investors or other stakeholders and compare your CAC with those of your competitors to see which ones are more effective. Lastly, it will help you identify weak points in your sales funnel (based on the number of leads acquired) and find ways to optimize it for more excellent conversion rates.

And, I think it would be helpful to invest in customer relationship management (CRM) software so you can track and measure your return on investment beyond the initial sale.

Knowing who your customers are and what they’ve spent so far will help you figure out which strategies should be applied to get more value from them. That, in turn, will lead to increased profitability.

Key takeaways:

  • Customer Acquisition Cost is the price of acquiring a new customer.  It can vary depending on your industry and how you’re attracting new customers (PPC advertising, SEO, content marketing, etc.)
  • Calculating CAC helps measure whether or not an advertising campaign is worth running.
  • CAC = Total Cost of Marketing / Number of New Customers Acquired
  • You can calculate the value of a customer over time by multiplying the average revenue per customer (AARPC) with the average retention period (ARP) or LTV (Life Time Value).