Customer acquisition is one of the most important aspects of any business. Yet, it may not be clear where to start.
In this post, we’ll explain everything you need to know about customer acquisition.
We’ll discuss what it is, how it works, the benefits it can bring, and how you can start building a marketing strategy around it.
By knowing what to do and where to start, you can increase efforts to get new customers and grow your business. So let’s dive into it!
Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is the total amount of money a company spends on acquiring new customers.
This cost takes into consideration: advertising, sales, and marketing costs.
CAC is important to track because it helps a company figure out if its current efforts to get new customers are worth it.
For example, if a company spends $100 on advertising and acquires 10 new customers, its CAC is $10.
$100 (advertising spend) / 10 (new customers) = $10 (CAC)
If each of those customers spends an average of $50 with the company, then the company has made a profit.
Although, if the company only acquires 5 new customers, its CAC will be $20, and will have less to spend on future marketing efforts.
$100 (advertising spend) / 5 (new customers) = $20 (CAC)
As you can see, spending more on your advertising restricts your ability to reach more prospects.
And spending less on reaching more people puts you in a situation where you’re acquiring fewer customers:
Scenario A
$50 (revenue from customer) x 10 (new customers) = $500 (profit)
Scenario B
$50 (revenue from customer) x 5 (new customers) = $250 (profit)
So as a result, companies need to track their CAC to ensure they’re profitable in their customer acquisition efforts.
How It Works
The first step in calculating CAC is determining the cost of your marketing efforts.
This includes money you spend on advertising, and the time and resources you invest in generating leads.
But if you’d like to keep things simple, start out by only including how much you’ve spent on running your advertising campaigns.
Once you have these figures, you can divide them by the number of customers you acquired during that advertising period to get your CAC.
While CAC can be a valuable metric for businesses, it’s essential to keep in mind that it doesn’t take into account the lifetime value of each customer.
In other words, it doesn’t tell you how much revenue each customer will generate over their relationship with your business.
As such, CAC should be used as one piece of information when making decisions about your marketing strategy.
Paying Close Attention To Your Cost
As any business owner knows, acquiring new customers is essential for growth.
So it’s important not to solely acquire customers for the purpose of acquiring them, but instead to acquire them as efficiently as possible.
The more efficient, the more profitable, and the more profitable means more opportunity for growth in your business.
To drive growth, you need to ensure that your customer acquisition cost is lower than your average revenue per customer.
If it’s not, you’re losing money or breaking even with each new customer you get.
Investing in targeted advertising or giving discounts for referrals are two ways to lower the cost of getting new customers.
But no matter how you cut it, you need to pay close attention to your customer acquisition cost if you want your business to grow in a sustainable way.
By keeping close tabs on your CAC, you can ensure that your marketing efforts are in good standing and that your team is meeting its quotas.
Also, knowing your CAC can help you decide where to direct your resources so that you can make the most return for your money.
In short, paying close attention to your CAC is essential to running a successful business.
Conclusion
Customer Acquisition Cost, or CAC, is a business’s total cost to acquire a new customer.
You can figure this out by adding up all your marketing and advertising costs and then dividing that number by the number of new customers you acquired in the same time frame.
Business owners need to pay close attention to their CAC because when it gets too high, they could lose money on every sale and shrink their business.
You can lower your CAC in a few ways, such as:
- Increasing conversion rates
- Lowering churn rates
- Finding better and cheaper ways to bring in new customers
If you want to help lower your Customer Acquisition Cost, contact one of our marketing consultants for a free consultation–we’re always happy to help grow businesses!
