Everything You Need to Know About Customer Acquisition Cost in 2023

Customer acquisition cost, or CAC, is a critical business metric utilized by businesses all over the world. It evaluates the resources required for a company to continue to grow and attract new customers. If you want to grow your clientele while still making a profit, you’ll need to know what CAC stands for, what it means, and how you can measure it.

Many businesses are looking for ways to boost their customer acquisition. Two of the most generally acknowledged marketing priorities among firms are lowering client acquisition expenses and demonstrating the ROI of marketing activities.

Customer Acquisition Cost (CAC) Formula

Customer acquisition cost is calculated by using this formula: 

Consider the following variables for this measure if you’re not sure what your “cost of sales and marketing” is:

Ad Spend

The amount of money you spend on advertising is referred to as ad spend. Advertising is a wonderful approach for certain businesses to acquire new consumers, but it’s critical to invest in campaigns that will resonate with your target audience. If you’re not sure whether you’re getting a decent return on a marketing effort, divide the revenue generated by advertising by the amount you spent on it.

Creative Costs

The amount you spend on content creation is known as creative costs. This could be money spent on attracting new talent to help your business grow, or it could be money spent on lunch for a team meeting. All of these expenses are factored into the content creation process.

Employee Salaries

Investing in great personnel is usually a good idea. So, if you think the price is too high, pay great attention to how you approach it. Other than implementing salary cuts or layoffs, there may be other ways to save money on salaries. Chatbots and marketing automation, for example, can boost your company’s overall efficiency by supplementing your team’s workflow.

Technical Costs

The technology that your marketing and sales teams employ is referred to as technical costs. A technical cost would be, for example, the cost of a reporting tool that tracks the development of your open deals.

Production Costs

The costs of physically manufacturing content are known as production costs. You’ll need to buy a camera, build a set, edit the video, and so on if you’re making a video. These expenses add up quickly, especially if you’re paying someone else to create your content.

Inventory Upkeep

Even if you’re a SaaS company, you’ll have to spend money on product maintenance and upkeep. If you sell software, this is the money you spend on user experience updates and patches.

How to Calculate Customer Acquisition Cost

The first step in calculating client acquisition cost is to define the time period you’re looking at (month, quarter, year). This will assist you in limiting the scope of your data. Then, tally up all of your marketing and sales costs and divide by the number of new clients you obtained during that time period. Your company’s anticipated cost of obtaining a new customer should be the outcome value.

Let’s imagine your business invests $500K in sales and $300K in marketing. In addition, during the previous fiscal quarter, your company added 800 new clients. The cost to acquire a customer for that quarter would be $1K ((500K + 300K)/800= 1K) if we calculated the CAC for your company.

You can compare CAC to other critical business indicators once you’ve computed it for your organization. You’ll learn a lot about your marketing, sales, and customer service campaigns as a result.

How to Improve Customer Acquisition Cost

There are a number of different approaches to help lower your cost of customer acquisition and continue making sales. Here are some strategies to consider:

Conversion rate optimization (CRO) should be a priority

Make it easy for visitors to become leads, or for leads to become customers and make purchases on your site. Optimize your site for mobile form submissions and purchases, test website language for clarity, and aim to build a touchless sales procedure so that your visitors can buy from you at any time.

Add value

Increase customer value by providing them with what they desire. Collect customer input, and do your best to provide them what they want, whether it’s a product fix, a new feature, or a supplementary product offering, to keep them coming back.

Improve customer retention

Customers that are happy to invest in your items are more likely to spend more than new customers. Repeat customers, on average, spend 67 percent more in the third year of their association with a company than they did in the previous two years. Existing consumers are easier to persuade of the value a company provides than new customers who have not yet connected with the organization.

Create a referral program for your customers

If you recommend a warm lead from your customer’s network who is already eager to learn more about your product or service, their CAC will be $0 if they convert. Build a client referral program that your customers want to participate in, and these “free” consumers will lower your CAC over time.

Produce content and evaluate its effectiveness

Customers that are highly engaged demonstrate a bond that extends beyond products and services. Content is used by businesses to provide relevant information to their customers. You may educate customers and establish brand confidence by delivering relevant material. Content, on the other hand, does not always perform as well as it could. Analyze the performance of the content in relation to the strategy. What can you do to improve specific aspects? Check the tone of your text, emphasize features and benefits, and include unambiguous calls to action.

What is Customer Lifetime Value?

Customer lifetime value is the predicted net profit that an individual or organization will provide over the course of their lifetime as a paying client.

When it comes to getting to know your customers and how they interact with your business, customer lifetime value (LTV) is an important component to consider. It also helps impact business decisions across the board by providing a clear appraisal of your marketing and support activities.

Customers with a high LTV cost more to recruit, but they deliver more value than other customers in terms of revenue, feedback, and referrals.

Customer lifetime value isn’t difficult to calculate, but it does necessitate the definition of a few key criteria along the route, such as average purchase value and frequency. Even if you have to guess these figures, having a good customer LTV can help you predict how much money a client will produce over the course of their association with your company.

Companies can determine how long it takes to replace each investment made in gaining new customers by defining customer LTV with CAC — and how to better spend that acquisition budget — by defining customer LTV alongside CAC.

How LGG Can Help You

A company’s sales figures and statistics might be impressive. At first glance, that appears to be a recipe for great success. Companies are looking for strategies to minimize overhead costs while also increasing revenue. Client acquisition cost is a measure that can assist you in determining the right balance between customer acquisition and lifetime value.

Every business can look to save costs while improving performance when it comes to customer acquisition. You can save time and money on other elements of your company by minimizing customer acquisition costs. Speak to us at LGG Media to learn more about how we can positively impact your revenue.