If you want to boost sales, you need to understand the mechanics of how your sales strategy is working.
Customer acquisition cost (CAC) is one of the most important metrics you can measure.
In this article, I’m going to tell you what it is, and how to measure it.
Ready? Let’s jump right in!
Table of Contents
- What Is Customer Acquisition Cost (CAC)?
- Why Is CAC Important?
- How to Reduce CAC
- Improving Customer Lifetime Value (CLV)
- If you want a lower CAC, you need to be efficient.
What Is Customer Acquisition Cost (CAC)?
CAC refers to the costs your company incurs in order to get one new customer. This is calculated as an average across all your customers, helping you ballpark the typical cost to attract a single customer to your organization.
The formula to calculate CAC is simple. Total the costs of your sales and marketing campaigns, then divide by the number of customers you’ve acquired from those strategies.
CAC = Total marketing & sales costs / number of new customers acquired.
You can decide how you define “customer,” precisely.
There are several costs you’ll need to roll into this equation, including:
- Ad costs. How much are you paying for all forms of advertising? Don’t forget things like affiliate links and product placement deals.
- Marketing and advertising vendors. Are you working with any third parties for marketing and advertising needs? For example, are you enlisting the help of a marketing agency to help you with SEO?
- Marketing, ad, and sales tools. What marketing, advertising, and sales tools are you currently paying for? Are you using a robust CRM to keep track of your customers or an automated lead generation platform costing you money every month?
- Marketing and sales staff salaries. One of the most commonly neglected costs in this equation are human salary costs. After hiring a team of people, they feel like an integrated part of your business – but you have to remember they represent expenses as well. It costs money to have a salesperson sitting in a seat – regardless of how many sales they make.
For example, let’s say each month, your company is spending $1,500 on advertising, $3,000 with marketing firms, another $500 on marketing and sales tools, and $10,000 on salaries for your internal team. That’s a total monthly cost of $15,000.
Now let’s say in a typical month your company attracts 1,000 new customers. That means your average CAC is just $15. ($15,000/1,000).
Why Is CAC Important?
So why does this sales metric matter?
For starters, it’s fun to know. If you’re a data nerd like I am, you try to quantify everything – and you love to see the world through numbers.
But if you’re not genuinely curious about your business’s CAC, I understand. There are plenty of great, objective reasons why you should be interested in it.
- Reducing CAC increases profitability. If you’re earning the same number of customers, but your costs decrease, you’ll make more money.
- CAC helps you balance the customer equation. For example, let’s say your business is currently struggling with customer retention and your customer lifetime value (CLV) stubbornly refuses to increase; lowering CAC can help you compensate for these challenges.
- Analyzing CAC can help you identify areas your strategy isn’t working. For example, if your CAC is disproportionately high because of an expensive advertising strategy, but that ad strategy isn’t bringing many customers, you can rethink your spending and approach.
How to Reduce CAC
We’ve established that reducing CAC can improve profitability. But there’s a problem.
If you reduce your costs too sharply, you could end up with fewer customers.
In our example earlier, our company spent $10,000 in employee salaries and $1,500 on advertising. So what happens if we simply fire half our employees and cut our ad budget to 0? We’ll effectively reduce our monthly costs by $6,500, but our number of attracted customers could plummet.
If the number of customers plummets, CAC may not move, or could actually increase. Spending $15,000 to attract 1,000 customers is better than spending $8,500 to attract 500 customers.
So what strategies can you use to reduce CAC without sacrificing customer acquisition?
1. Make sure you’re calculating CAC correctly (i.e., fully).
First, make sure you’re calculating CAC correctly and fully. Sometimes, in an effort to fudge the numbers, or out of pure ignorance, salespeople and marketers end up underestimating CAC. They skip over employee salaries or forget to include subscription tools.
If you want to make your impact count, you need to know what you’re spending, objectively. Go over your expenses with a fine-toothed comb – and get a neutral third party to check your work and see if you’re forgetting anything.
2. Define and understand your target audience.
Audience targeting is huge. Better audience targeting strategies could drastically reduce what you spend – and in multiple ways.
It’s best to think of audience targeting as unfolding in two main challenges:
- Identifying the right audience for your product
- Reaching that audience segment effectively.
The first challenge requires you to do market research – and potentially challenge your long-held assumptions. Who are the people most likely to buy your product?
The second challenge can be overcome with a combination of research and experimentation.
The more you learn about your target demographics, the better you’ll be able to target them with the right channels and messages; experimental data can guide you from there (more on that later).
3. Implement retargeting.
No matter how good your inbound strategy is, some potential customers are going to slip through the cracks. They’ll interact with your brand briefly, but they won’t make a purchase.
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This is where retargeting shines.
Retargeting allows you to reach these “almost customers” with ads, hopefully winning them over with a subsequent interaction. Best of all, it’s cheap – so it’s not much of an addition to your expense list.
4. Optimize your conversion rate.
Whether you’re attracting people with digital marketing, traditional ads, cold outreach, or some combination of these strategies, you need to spend time optimizing for conversions.
Your website, your landing pages, and even your social media profiles should also be fine-tuned to maximize the number of people who ultimately buy something from your brand or sign up to learn more.
This isn’t easy or quick; in fact, optimizing for conversions should be treated as a long-term, recurring addition to your suite of strategies.
You’ll need to tweak different variables related to design, layout, copy, and even functionality to figure out what works best.
5. Master your sales funnel.
I’ve written about sales funnels in the past, so I’ll keep this brief. A sales funnel is a conceptual framework that helps you illustrate how people discover your brand and eventually become customers.
It follows a pattern like Awareness > Interest > Decision > Action, but different industries and different types of businesses will have slight variations.
If you want to reduce CAC, you need to fully understand how your sales funnel works and optimize your strategy for it.
That means targeting people at the right stage of the sales funnel, figuring out where your sales funnel is “leaking,” and so on.
6. Automate everything you can.
Automation isn’t the answer to everything – and it’s still important to have a team of salespeople to have real, personal conversations with your leads and customers. But it can definitely you a lot of time and money.
Simple things, like automating email follow-ups or providing your salespeople with a steady stream of leads to call, can really streamline your operation and boost efficiency.
Check out my list of the top 11 sales automation tools.
7. Cut the fluff.
Go through your strategies, tools, and other costs, and cut the fluff. I guarantee you that at least some of the things you’re spending money on simply aren’t working – or aren’t justifying the expenses they present to your organization.
For example, let’s say you’re paying $100 per month on a subscription for a tool that nobody in the office likes or uses frequently – and there’s an open source version you can use for free. Cut it!
Or let’s say there’s a legacy marketing strategy that just isn’t sending new leads your way. Cut it!
Improving Customer Lifetime Value (CLV)
Here’s another interesting way to improve your sales equation: increase customer lifetime value (CLV). Let’s say you’ve managed to reduce your CAC marginally, but you’ve hit a plateau; it doesn’t seem like CAC can go any lower!
Increasing CLV can increase the value of each customer, with virtually no ceiling. If you’re paying $15 to acquire each customer and they’re spending $100 with you, that’s awesome. If they’re spending $300, that’s 3 times as good.
Another way to improve CLV is to focus on customer retention. No matter how much you reduce customer acquisition costs, customer retention is probably going to be less expensive. Make sure you’re investing in customer retention so you can keep the customers you have (instead of only securing new ones).
I won’t get carried away with CLV just yet – that’s for another guide, coming soon!
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Jayson is a long-time columnist for Forbes, Entrepreneur, BusinessInsider, Inc.com, and various other major media publications, where he has authored over 1,000 articles since 2012, covering technology, marketing, and entrepreneurship. He keynoted the 2013 MarketingProfs University, and won the “Entrepreneur Blogger of the Year” award in 2015 from the Oxford Center for Entrepreneurs. In 2010, he founded a marketing agency that appeared on the Inc. 5000 before selling it in January of 2019, and he is now the CEO of EmailAnalytics.