Take a look at your company’s margin: do you smile, or frown?
Does it seem like you’re heading in a good direction, or is it more likely that your business model is no longer working?
Here’s the paradox.
Even if you’re attracting a steady stream of new customers each month, you might find yourself in trouble at the end of the quarter if you are not careful.
Everything in this Universe is perfectly balanced.
It applies to eCommerce as well. So, there must be a cost for every new customer earned, right?
In this case, each new client you acquire will cost you real dollars. And many eCommerce businesses come to a dreadful conclusion: they can’t afford to acquire new customers anymore.
You want to avoid finding yourself in this scenario and steer clear of cash flow pressures.
So, you need to know the answer to a simple but essential question:
How much can I afford to pay to acquire a customer?
Enter the eCommerce Customer Acquisition Cost (CAC) – one of the most misunderstood metrics in the eCommerce universe and today’s subject.
Today you’ll read more about this metric.
Moreover, we’ll discuss how to correctly calculate your customer acquisition cost, why you should monitor it constantly, and you’ll find practical ideas for reducing the cost.
So, do you want to improve your CAC? Let’s begin.
What is eCommerce Customer Acquisition Cost (CAC)?
Customer Acquisition Cost is measured by how much a company spends to acquire each customer.
This is the accumulation of how much you spend on your sales and marketing, salaries, discounts or vouchers, and other miscellaneous that were incurred during a period:
- marketing costs,
- the wages you pay your employees (freelancers and 3rd party experts included),
- the tools you use,
- and any rent & utilities you spend for your marketing & sales departments.
While it might seem pretty straightforward, this metric is one of the most misunderstood terms in the entire eCommerce universe.
The confusion comes from a simple error: most marketers don’t look at all the data and make incomplete calculations.
They look at their marketing costs. Maybe some go further and add production costs, etc. However, the picture is still incomplete since they don’t think of the wages they pay their employees. Or maybe they look at the salaries, but they leave out the subscriptions to various tools.
You get the idea.
The key takeaway from this chapter: do not confuse CAC with your Cost per Order (CPO – Facebook Ads, SEO, Google Ads, TV commercials, etc.).
Why Does CAC Matter?
CAC is the window that shows if you’re overspending or underspending on campaigns because it shows your ROI. It also lets you know the effectivity of your current strategy and the channels you’re using.
There are many things that can make or break a business – a weak product, unnecessary costs, but the main one is ‘unsatisfied customers’. Your business can’t exist without customers.
This means that customers are its core and center. But you don’t want to be overspending or underspending when it comes to acquiring new clients.
Knowing your CAC will give you insight into the most effective strategy your business can take. If you know how much you spend on acquiring new customers, you’ll immediately understand what you need to make more profit with your growing company.
This will also let you know if you’re spending too much or are you spending too little.
How to Calculate the Customer Acquisition Cost
To accurately calculate your customer acquisition cost, you must look at the overall costs involved in marketing & sales.
If you didn’t look at CAC from this holistic point of view, it’s high time you changed your ways of defining & monitoring the success of your company.
Unless you do it, you will miss out on having a realistic range for the customer acquisition cost. Consequently, you won’t be able to evaluate the health of your business correctly.
This means you’ll be biased, invest more than you can afford, or bleed money over an unproductive marketing strategy.
Here’s the formula for accurately understanding your CAC.
First, add up all the costs associated with:
- Wages (the salaries you pay your staff, including freelancers or agencies you employ to acquire new customers)
- Overheads (rent, utilities, equipment – everything you spend on marketing to acquire new customers)
- Paid marketing (money you invest in marketing – usually it involves expenses on paid advertising and agency fees)
- Tools (any tools/ software your Sales & Marketing teams use for analytics).
These costs are divided by the number of new customers you acquired, and voila!
You have your CAC.
For example, a SAAS company spent $20,000 on a campaign promotion that lasted a month.
To get the CAC, add the sales and marketing cost, discount, and vouchers if you have any, plus the staff salary or any commission, then divide the total by the number of customers that signed up within the duration of your event or campaign.
Following the campaign, the sales team reported 10,000 new customer sign-ups and purchases. Using the formula, the computation will be:
The overall sum of campaign expenditures / Customers acquired
$20,000/10,000 = $2/customer
The CAC will be $2 per customer.
It is advisable to have a ratio of 3:1 for your cost of acquisition.
The CAC shouldn’t be higher than the value your customer spends. To compute for the Customer Lifetime Value (CLV), look at the gross margin that you expect to make over the duration of the client’s stay with you.
Note that it’s not advisable to overspend or underspend on CAC.
If you’re spending too much, it means you might be losing money. If you spend too little, you might be missing out on a ton of marketing opportunities.
So, how long will it take until you to generate a profitable revenue stream?
It depends on what kind of business you’re running. It’s different for mobile phone companies, or a monthly subscription-based business, or SAAS. Ultimately, the goal is to reduce acquisition cost while maintaining the conversion of leads high.
Calculating CAC per Channel
Let’s say you’re using multiple channels, and you want to know how effective a channel is over the other. This is where CAC comes in. For example, running two campaigns. One is for YouTube, and one is for eMail.
What you do is, to sum up, all your expenditures for all the campaigns and divide it by channels. This way, you know which channel performed the strongest and which one needs to improve.
How to Optimize Your Customer Acquisition Cost
Now that you have adequately assessed your CAC, you might find yourself in an unhappy situation. At this rate, you can’t afford to acquire new customers.
You realize your old ways don’t have the impact they used to. Your current business model doesn’t work anymore, so you need new ways to get things done.
And you need them yesterday, if possible.
So, here are a couple of strategies you could try if you want to reduce customer acquisition costs.
Leverage Repeat Customers as an Acquisition Tool
While this might sound unethical, it’s simply rewarding your loyal customers with special offers and creating affiliate programs for your promoters.
You might find out that it’s cheaper to reward an old customer for bringing you a new customer than to spend that $ on paid marketing.
It’s a win-win situation. You get a new customer, your loyal customer feels valued, and the new customer solves his problem with your help.
Bonus points – your customer retention rate will surely increase once you show your customers they have a real reason to return.
One of the most straightforward strategies to reduce customer acquisition costs is to improve the customer retention rate and leverage your promoters.
Speaking of promoters…
If you are ready to dive into the strategies for keeping your customers happy, you might want to read The Ultimate Net Promoter Score Guide. You can find it here for free.
Read it and learn how to use NPS to grow your business and become more customer-centric.
Design Dedicated Landing Pages with Your Ads
Your Ads get clicks.
But you don’t see sales. So you assume the Ad didn’t work, right?
Well, the situation is more nuanced than that. Usually, if an ad gets clicks, it’s done its job: it brought people onto your Website. But the journey doesn’t stop there.
It’s what happens after the click that matters.
Many eCommerce marketers link the Ad to their homepage. We wouldn’t recommend this, as prospects can go around wandering on your Website…and forget why they came there in the first place.
Don’t overestimate the memory of your prospect. If you throw information at prospects and give them many places to click on your Website, they might forget to buy.
They take a look at your blog, read your reviews, maybe scroll through your Team page…and that’s it. You’ve lost them.
You’ve lost them, so you wasted your budget on those Ads.
To ensure you’re getting back each penny you invested while improving the conversion rate, you should link Ads with dedicated landing pages.
Keep it simple and send traffic to high-converting pages: product pages, pricing. Gently guide the prospect towards the checkout page, as you would show a toddler through a maze.
This approach will surely improve your conversion and lower your CAC.
(since you are not investing in Ads that don’t work).
Automate Wherever You Can
(You should find an automated solution for repetitive tasks anyway. Maybe now it’s the right time to do it).
But wait – automation doesn’t mean investing more in tools and raising my CAC?
It depends. You will need to test it and see how it works inside your ecosystem.
Automating as many processes as possible means hiring fewer people and paying fewer wages. A simple task doesn’t require as much brainpower as before, so fewer people are needed to do it.
Ten years ago, you might have needed 15 people to gather and analyze your customer data. But today, you can use a SaaS like Reveal to create highly targeted marketing and sales campaigns on all channels.
You might find that the subscription to such a SaaS is cheaper than paying 15 data analysts to monitor and use your data in the long term.
This example applies to any other areas inside your business. But again – you have to crunch the numbers and see if it’s feasible for you.
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Continuously Track, Monitor, and Optimize
Don’t take anything at face value. Even if a specific strategy brought you money a couple of months ago, it doesn’t mean it won’t lose you money today.
The eCommerce landscape exploded over the years, and things are changing faster than ever. You can’t afford to base your marketing strategies on your gut feeling anymore.
It’s better to play it safe and calculate your customer acquisition regularly. Check the cost of customer acquisition each time you change your strategies or try something new.
It may seem exhausting to be on the constant lookout, but in the long term, you’ll gain much more if you are going to be data-driven and prioritize the things that matter.
Make Use of Your Data
We’ve already seen the costs of paid advertising go through the roof. The costs alone will weigh your CAC more than you could maybe afford.
So, here’s where you could save a part of your budget and weed out the Ads that will never perform for you.
Take a look at your creatives and make sure you’re rising above the noise. What makes you unique? What’s the specific value your product brings?
Don’t be afraid to lean into peoples’ emotions and talk about their pains & desires. Don’t be basic – invest in better creatives and talk about those things your competitors won’t.
Besides the creatives, you can also tweak the audiences you’re using.
Target your audience and use lookalike audiences in Facebook Ads and Google Ads to acquire new clients similar to your best customers.
Optimise Main Elements
Conversion Rate Optimization might be a different feat, but it still affects your CAC.
If you are not converting, you might want to consider the following:
- The landing page;
Invest more in customer research and then in the creatives. Use specific landing pages for particular products and change the creatives accordingly.
- The messaging;
Same as with the landing page. Emphasize the value you bring and what you can do for your prospect.
Don’t brag about how awesome your products are. Instead, show your prospects you understand them and that you genuinely care about solving their problems.
Pay Close Attention to Your Products
The better your products are, the easier it will be to sell them, right?
So, don’t take product optimization out of the mix. Always survey your existing customers about their purchases: did they like the products? Would they recommend the products to their peers?
Then, look at your data: are there products that sell better in a specific demographic? Or products that decrease your customer retention rate? Could you do anything to sell better products and eliminate toxic products?
Reveal is the SaaS that will help you get a bird’s eye view of your product assortment and help you determine which products are toxic and which bring you the most value.
Effortlessly pinpoint which products or brands are thriving and which ones are struggling. Stay ahead of the game by knowing what products are in demand, ensuring you always have them in stock to keep customers satisfied.
Easily identify any irregularities for vendors or locations and notice significant improvements that can be duplicated across various locations, or downturns that need immediate action to avoid further losses.
It’s easier to retain customers (and cheaper to acquire them) when you sell high-quality products that people love. So, don’t fall in love with what you sell unless the data proves you have a reason to.
Final Tips on Reducing the CAC
- Use A/B testing.
For SAAS companies, set up landing pages with different offers, then split web traffic so that they land on different pages. You can measure conversion rates with this method. - Social Media.
Be visible and connect with new prospects by creating and optimizing your Twitter, Instagram, Facebook, and LinkedIn profiles. - Update your content.
Keep your content new and fresh.
Everybody knows the power of content nowadays, so it’s a battle of who can produce the latest and most useful content.
They want new information that answers more modern problems and challenges that continue to emerge today.
Here’s a content quality checklist that you can use to guide you in auditing your content, whether it’s SEO-ready and easily searchable or if you need to improve it for better visibility. - Leverage testimonials.
The voice of the customer will always be louder than any trend or strategy.
A recent study revealed that 88 percent of consumers are influenced by reviews when it comes to their buying decisions, while 72 percent of them say positive reviews make them trust an establishment more.
The purchase for a product with five reviews is 270 percent greater than a product with no reviews. You can use testimonials on your website, youtube, or social media. You can use written, video, or photo reviews. - Optimize your site and grow your online presence.
Search engine optimization is vital here. It’s now the eCommerce era, and ranking on top of Search Engine Result Pages should be at the top of your priority list. In 2019 alone, it’s estimated there will be 1.92 billion digital buyers globally.
Online shopping is growing in all areas of the world and becoming a part of the everyday consumer’s lives. It’s advisable to not only ride the trend but be on top of it but keeping updated and optimizing your website for Google.
Verse yourself with updated link building strategies and SEO techniques, but you don’t have to do it yourself since there are companies that outsource these kinds of services. - Get referrals from existing clients.
Having a loyal customer base will be your best marketing investment.
It’s been established several times that existing customers lead to an increased profit, and this rings truer the longer they stay with you.
The goal is not just to turn leads into customers but to your very own brand advocates.
Benefits of Optimizing Your CAC
Spend Less than Your Competitors
We hate to be the bearer of bad news, but we have to say it: it’s getting costly to acquire new customers. And things will only go downhill from here.
The media landscape is ultra-saturated, and new players join the eCommerce game every day.
Some are experienced marketers; some are still dipping their toes into the water.
The faster you move, the wiser you move, the quicker you can rise above the noise and save money where your competitors are losing.
And when competition is fierce, optimizing your customer acquisition brings you an undeniable advantage.
Make Room for Long-Term Growth
When the CAC isn’t worrying you anymore, you can focus on the more exciting stuff.
While your competitors are fighting over Ad space, you can increase your margin by optimizing the customer lifetime value and earning more from existing customers.
Deliver a better customer experience and increase customer retention. Don’t waste your time on pity battles, such as getting X number of new customers each month, but keep an eye on the real prize: achieve sustainable growth and scale your business.
Use Your Optimized CAC as a Benchmark
Once you’re done with the improvements and have reached the golden ratio, you can use this metric as a benchmark.
Meaning – when you reach a reasonable, affordable CAC and your acquired customers are good customers, you can compare it to your KPIs.
And you always have something to come back to if you’re unsure of your numbers.
Compare and contrast your numbers to your ideal CAC, and you will always have a clear view of where you’re standing.
You will be done with the guessing and the wandering into the darkness of an unmonitored eCommerce business.
Instead, you get clarity, long-term growth, and the certainty that you’re going on the right path.
Frequently Asked Questions about the CAC
How Do You Optimize the Customer Acquisition Cost?
You can create affiliate programs for your best customers. Also, you can leverage emotions to improve your messaging, use lookalike audiences and advertise to people similar to your existing customers, and even reduce money spent on wages by automating routine, repetitive tasks.
What is the Average Customer Acquisition Cost for eCommerce?
The average CAC varies and depends on the products, the seasonality, and even demographics.
According to Shopify data, the average CAC for a small eCommerce business (less than four employees) is around $58.64. The bigger the company, the bigger your CAC will be.
How Do You Calculate the Customer Acquisition Cost in eCommerce?
Add up all the costs associated with Sales and Marketing (meaning: wages + overheads + paid marketing + tools) and divide them by the number of new customers acquired.
The result is your CAC. You’ll normally want to calculate the CAC over a pre-defined time period.
What Is a Good Customer Acquisition Cost?
To determine whether your CAC is good or you’re overpaying, you need to compare it to your Customer Lifetime Value. Divide your CLV to your CAC, and the results will give you an idea of where you’re at.
Ideally, CLV:CAC should be 3:1 or 2:1. If it’s 1:1, it means you’re not making a profit, and if it’s lower, it means you’re bleeding money, and you need to change something asap.
