Customer Acquisition Cost, abbreviated as CAC, simply tells you how much you are spending to acquire new customers.
CAC is a very important business and marketing metric.
It usually includes the total cost of sales efforts, marketing and branding campaigns, and pre-signup customer support. It also include as well any property, equipment or tools needed to convince a customer or consumer to buy a product or service.
CAC should always be below the Customer Lifetime Value, otherwise the business would be losing money with each customer, a practice that would not be sustainable unless you have other sources of revenue.
Why is CAC important in marketing?
Customer Acquisition Cost is the most important metric in marketing, and in business management generally. CAC is important for small businesses, medium and big companies. Big and medium firms have separate units or teams, with separate budgets, thus the CAC can be a metric that helps management keep things in perspective and tune strategy, even if the CAC is high . For small businesses, it is less about strategy and more about immediate profit, you need to pay less to acquire a customer than the costs to provide a product or service to that customer. In general, it is important to know how much it is costing to acquire a customer to avoid spending on marketing that is not leading to the optimal results.
example: A company might assign $1 million for a marketing campaign, and the none repetitive product the company sells costs $10. If they notice that the ads bring 1 million customer, thus create sales of $10 million, then they would think that the campaign is working. If they bring 100 000 customer, then the money they put in marketing is wasted. But what if there are many marketing campaigns and different branding and marketing effort, how to measure all this? Answer: With CAC, Customer Acquisition Cost gives the simple figure that you can immediately use, and compare the money the client can bring or CLV to the direct CAC of each marketing campaign.
How do you calculate CAC?
When it comes to marketing, you simply divide the amount spent on that specific marketing campaign by the number of customers acquired.
CAC = Marketing Budget Spent / Total customers acquired
When it comes to the general company management, you will need to include other factors like the salaries of employees involved in the marketing and sales, the different costs (including advertising and marketing), the overhead … basically all the costs that are required to acquire the customer.
CAC = Marketing Budget Spent + Salaries of people involved in acquisition + Overhead / Total customers acquired
Lowering the Customer Acquisition Cost !
Startups often try to reach product market fit, usually that moment is when the CAC makes business sense for the startup.
Medium and small businesses, don’t try too often to optimize the CAC, whereas big corporation do.
Lowering the customer acquisition costs can be approached in 2 ways:
1- Outsourcing, to lower Customer Acquisition Cost.
When it comes to lower costs, the term outsourcing immediately pop up in our brain, but what exactly can be outsourced that can help reduce the CAC ?
a- Outsource the pre-signup customer support.
In other words the support agents that answer pre-signup or pre-purchase related queries. This is usually done via Chat, email or inbound phone. And agents usually use specialized software like Salesforce to process all these requests from a single central place. Some of these companies extend beyond pre-signup and offer Business Process Outsourcing (BPO), like Concentrix, Accenture, Cognizant, Wipro, Infosys, Teleperformance …
b- Outsource the sales.
This part can be tricky, finding a good sales team is not easy, and often good sales people tend to become expensive fast, as they move to more lucrative industries. Thus maybe test multiple small teams and see if anything fits.
c- Outsource marketing.
Outsourcing marketing is a no brain-er, the amount of time and effort needed for marketing these days, makes in house marketing no longer cost effective nor competitive enough. This might have one of the biggest effect on your CAC, as it helps you acquire customers at a lesser, especially when we are talking about traditional marketing. Marketing outsource sites: Marketing Outsource (general marketing outsourcing), Content marketing outsource (to outsource the time consuming content marketing).
2- Experimenting with marketing, to lower Customer Acquisition Cost.
Another way to lower the customer acquisition costs is to find a marketing or sales channel that is optimal for your service/product. Not all channels fit for everything. For instance, instagram influencers can be a good channel for a line of apparels but a bad channel for a tech product. It is important to experiment and test different marketing strategies. Usually the holy grail of marketing are Viral marketing and Growth hacking.