Customer acquisition cost is the amount of money that you spend to attract each new customer. This important economic unit shows how successful your business model is.
In the article, we will discuss average CAC and the difference between CAC and lifetime value, explain the formula of calculating this metric and give 4 tips to reduce it.
Why is customer acquisition cost important?
CAC shows the money spent on marketing and salaries. If you know this metric, you can build a marketing strategy, monitor the effectiveness of channels, and optimize costs without losing customers.
Customer acquisition cost is frequently compared with lifetime value (LTV) and is particularly important for SaaS companies. There are three more reasons why you should keep an eye on CAC.
- It helps optimize the LTV/CAC ratio. You should do cost optimization regularly. As a guideline, you can aim for a value of 3:1. This means that for every dollar spent, you earn $3, which is quite good for every business.
- You can define and optimize the payback period. If you have just started your business, CAC will give you an idea of how long the period of payback can take. This is especially true for those companies that practice the freemium model.
- CAC shows the health of your business in the future. If you want to know what amount of profit you will receive, add up the CAC for previous months and subtract the projected revenue.
It is vital to understand the difference between CAC and cost per action (CPA). CAC measures the cost of attracting a customer, CPA — the cost of a specific action that a user performs. For example, if you watch YouTube for free, you are measured using CPA. If you have bought YouTube Premium, you are measured using CAC.
Continue reading to discover more about the average CAC in different spheres.
Average Customer Acquisition Cost
This metric shows what CAC is normal for your business. We will show the statistics in this section. Read the article to find the answer for yourself.
The problem with CAC is that some companies calculate the ‘blended’ costs and include customers acquired without any spendings. However, it is vital to differentiate
- Organic CAC includes total new customers acquired across all channels.
- Inorganic CAC includes only new customers acquired through paid marketing.
Look at the table below to discover the average CAC in different industries.
We can see that CAC varies for different spheres. Both average organic and inorganic CAC are the highest in education. This means that acquiring new students for universities and colleges is the most expensive. The cheapest organic and inorganic CAC are for consumer eCommerce and retail.
Keep in mind that you should not concentrate on average CAC. Your company may reduce customer acquisition costs using some tips which we will describe in one of the next sections.
There is one more important metric connected with CAC — LTV:CAC ratio. We will describe the difference between the customer acquisition cost and lifetime in the next section.
Customer Acquisition Cost vs Lifetime Value
Customer acquisition cost is related to customer lifetime value. LTV is how much money you earn from one customer and CAC is how much you spend on attracting them. In other words, the rise of LTV means that your profit is increasing and the rise of CAC — that it’s decreasing.
Tracking these metrics is incredible for every successful business. We will explain how to calculate CAC in the next section, but now let’s discuss the meaning of the LTV:CAC ratio.
- 1:1. Such a model is not viable, as the company loses money with every acquisition.
- 2:1. This means that your business earns twice more money than you spend on customer acquisition. You make very little profit.
- 3:1. You earn 3$ for each 1$ spend on acquiring customers. It is a normal result for companies, but there are still things which you can improve.
- More than 3:1. Great result! Continue working to maintain this value.
The high LTV:CAC ratio is the basis of many successful SaaS projects.
Note that you need to calculate both metrics regularly and from the same period. It's time to discover how to calculate CAC.
How to calculate customer acquisition cost?
Reducing CAC is one of the ways to earn more from your business. To do it you need to know how much you spend on customer acquisition.
Now let’s look at the ways of calculating CAC.
There are two methods: basic and complex. The basic formula shows an approximate CAC, as it doesn’t include a lot of expenses. The complex formula includes overhead costs, such as using professional services, sales and marketing wages, software costs, and other costs which are not incurred in marketing. To get a more exact result and make serious conclusions use a complex method.
This formula allows you to find out an approximate customer acquisition cost. Take a certain period and calculate the total marketing cost for acquiring new customers (MCC) and total customers acquired (CA). Divide the first number by the second one.
CAC = MCC / CA
For example, you have spent 3000$ (MCC) on marketing for the last 3 months. You have acquired 100 customers (CA). So, your CAC for the last 3 months is 30$ (3000/100).
However, you spend much more on customer acquisition than you invest in your ad campaign budget. We cannot ignore the salaries of specialists, subscriptions to paid services that they use, and other expenses. Often these spendings significantly affect the real CAC.
It is reasonable to calculate CAC for each channel. Different channels require different expenses and they can give different profits. To take it into account you need to use a complex formula.
Use this way of calculating to get a more exact result.
To calculate CAC add MCC, wages connected with sales and marketing (W), marketing and sales associated software cost (S), professional services (PS), and other overheads (O); then divide the result by CA. Don’t forget that you should use all metrics from the same period.
CAC = (MCC + W + S + PS + O) / CA
Let’s look at the example. You still have spent 3000$ on marketing (MCC), but you have also spent 200$ on wages connected with sales and marketing (W), 100$ on marketing and sales associated software cost (S), 300$ on professional services (PS), and 100$ on other overheads (O). Your company still has acquired 100 customers. So, CAC is 37$ (3700/100).
Calculate CAC for different channels and compare. You’ll see where you spend less money on acquiring one customer and would be able to make changes to your marketing strategy.
If you think that customer acquisition cost in your company is too high, there are effective ways to reduce it and earn more from your business. Read the next paragraph to discover some useful tips.
4 Tips to Reduce Your Customer Acquisition Cost
At some point, every founder considers reducing CAC as a way to increase profits. Follow our tips if your goal is to make acquisition costs lower without losing the number of customers.
- Optimize your sales funnel. Quantify each step of the sales process, analyze the buyer journey and pay attention to each step. Find the problems and difficulties customers face and solve them. Test different strategies. First, the CAC may grow, but gradually you will determine which customer acquisition methods work for you and focus on them.
- Build loyalty. Loyalty is a measure of a customer’s likelihood to buy from a company or brand again. It is a way to improve both CAC and LTV. To build loyalty, segment your clients, encourage customers to give feedback, and act on it. People should feel that customer care is a priority for the brand. Read our article about customer loyalty for more pieces of advice.
- Improve the effectiveness of marketing channels. If you calculate CAC for every channel, you may concentrate on more effective ones. To create good content, you need to know your audience, provide quality, write eye-catching titles, proofread and optimize. Remember, that content marketing is the way to encourage people to buy as fast as possible.
- Use CRM marketing. CRM marketing helps you analyze, manage and improve customer relationships. To succeed in it, choose the right CRM system, qualify and segment your customers, use a customer-centric approach, and support clients on each stage of the buyer journey. CRM implementation lets you optimize the sales funnel and reduce CAC.
Congrats, now you know what CAC is and the difference between CAC and LTV; understand a formula of calculating this metric and have 4 tips to reduce it. Use your knowledge to earn more from your business.
Last Updated: 20.09.2021