Acquiring new prospects is not easy, but every successful business needs to grow its customer base in order to expand. Your aim is to have a steady flow of new clients and cultivate a loyal following. Then again, studies show that getting new customers is more expensive than retaining them. The cost can rake up to seven times more compared to how much a business would have spent on nurturing existing clients. Considering the amount of work and money that comes into pulling in new clients, you should know the most important metric in business: Customer Acquisition Cost (CAC).
What is 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.
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 Customer Acquisition Cost (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.
Customer Acquisition Cost Formula
The formula for customer acquisition cost is:
CAC = Costs on a campaign or marketing / Customers Acquired
Add all the expenses on acquiring customers (marketing, renovation or web redesign, employee salaries, ad spend, publishing, etc.), and divide by the number of customers acquired for the duration of the campaign.
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.
Tips on reducing 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.
Visualize the customers you want to have and then think about what you need to do and what needs to happen for you to acquire them.
When it comes to customer acquisition costs, the idea is to lower how much you spend in acquiring new clients because it means that your company is thriving and becoming more sustainable. But remember that in whatever business you’re in, whether you’re an internet service provider, a SAAS company, or a web design agency – the final goal is to acquire new clients and turn them into lifetime advocates.