What is Customer Acquisition Cost, and How to Reduce It?
Winning over a new customer is not an easy feat. A lot of planning goes into building strategies around acquiring a new customer. Brands spend millions on marketing to ensure they reach the right target audience. One metric that these organizations need to watch is the Customer Acquisition Cost (CAC). With the emergence of online advertising and digital marketing, it is now easier than ever to understand how much of your resources go into acquiring a new customer. This blog outlines why you should be tracking your Customer Acquisition Cost (CAC) and tells you how you can reduce it for profitable sustenance.
What is Customer Acquisition Cost (CAC)?
In simple terms, Customer Acquisition Cost (CAC) is the total amount of money spent on sales and marketing to earn a new customer over a specific time period. It ideally includes all program and marketing spending, commissions, salaries, bonuses and overhead costs associated with attracting and converting new customers. Remember, you can acquire customers through several channels, including
Remember, you can acquire customers through several channels, including
- Social media
- Outdoor advertising
- Email marketing
- PPC/SEM (Google Ads)
- Traditional advertising
- Tradeshows and in-person events, etc.
The CAC is of utmost importance to two parties:
- Investors (external)
- The brand
Knowing the CAC is vital to investors as they use it to analyze the scalability of the business they invest in. They can determine a brand’s profitability by looking at the difference between how much money they can make from customers and the costs of extracting it.
Bonus: If you’re looking to get funding for your business, you can check out Velocity blogs. We have many interesting articles on funding written for you.
As for the brand, the CAC helps them optimize the return on their advertising investments. Put simply, if the cost to acquire new customers reduces, the company’s profit margin improves, making a more significant profit. It is vital to note that the CAC varies across industries. This can be due to the differing sales cycles, purchase frequency, purchase value, customer lifespan, etc.
How To Calculate The Customer Acquisition Cost?
We’ve established that CAC is an important metric to keep track of. Now let us look at how you can calculate your CAC using a simple formula.
Cost of Acquisition = Sales & Marketing expenses/Total number of customers
Here, sales and marketing expenses are the expenses you incurred over a specified time period on advertising and marketing, commissions and bonuses, salaries and overhead costs related to sales and marketing. The total number of customers here is also considered from within the time period.
Here is an example to understand this.
Imagine you spent ₹20,00,000 over a year on sales and marketing efforts for your company and were able to acquire 2,000 new customers. In this case, your CAC will be calculated as follows:
CAC = 20,00,000/2,000
CAC = ₹1,000
Therefore, your CAC would be ₹1,000.
Once you have evaluated the CAC for your company, you can compare this value against other key business metrics to uncover in-depth insights about your marketing, sales, and customer service campaigns. We also recommend you to look at customer acquisition cost benchmarks for your industry and also of your competitors to identify opportunities. Remember, the cost of retaining a customer is lower than the cost of acquiring a new one. And so, it is natural to want to spend more on retaining a customer to ensure confirmed sales. However, to allocate more budget to retention, you need to reduce the budget for acquisition. Wondering how you can do that? Read along.
Tips And Best Practices To Reduce Customer Acquisition Cost
Per a McKinsey report, companies globally spend $1 Trillion just on marketing. While not all of it would be on customer acquisition, a major chunk of it goes to the cause. Here are six ways in which you can reduce your Customer Acquisition Cost (CAC) significantly.
Identify the Target Audience
It goes without saying that knowing who your audience is, is vital to an organization’s marketing efforts. Rounding in on your target audience and working on creating relevant content, and spending resources on attracting them can help reduce your customer acquisition cost by a lot. Too often, marketers make the mistake of selecting a broader audience in the hopes of reaching more people. However, in the pursuit, they fail to cater to the niche that would benefit their organization truly. We recommend creating buyer personas, investing in market research, and efficiently targeting only the prospects that fall within the boundaries of the persona you have created.
Leverage the Right Marketing Channel
While you conduct market research, notice which marketing channels bring you the most conversions. Having multiple channels to reach the prospects is a great idea; however, knowing where to invest is equally important. For example, if you notice that your brand gets the most customers through your social media efforts than traditional marketing, it only makes sense to allocate more resources to social media marketing and simultaneously reduce the resources from other channels.
Also Read: If you are planning to grow your instagram followers, we have a complete guide on Instagram marketing for you!
Have In-Depth Marketing Insights
Data analytics is the backbone of marketing today. Having in-depth insights about your prospects, their buying behavior, their preferences, etc., can help you in more ways than one. Not only would it help you assess how to attract them, but it also would help you determine if your CAC is sustainable. Calculating important metrics through data analytics helps you devote your marketing budget to the right efforts and discontinue the ones that are not helping your bottom line.
Enhance the User Experience
The customer is always the king. More often than not, a mediocre buying experience leads to more cart abandonment than you’d imagine. Buyers today want a seamless buying experience. Poorly designed websites, glitchy apps, and sub-standard customer service are all recipes for a high CAC. The more people abandon their carts, the lesser lead conversion you have. The solution is to always ensure a streamlined buying process.
Try out A/B testing on your site to see what most of your customers like. See what works and what doesn’t. Be sure to leverage on-site performance metrics to look at areas of improvement. And remember, be mobile-first.
Also Read: Must-Have Cart Abandonment Email Templates For Ecommerce Businesses
Leverage Affiliate Marketing
We all know what affiliate marketing is. Today, it is one of the most trending social media tactics to increase brand awareness and break into new customer bases. Marketing through affiliates is often done on a commission basis, and so it helps reduce the customer acquisition cost (CAC) significantly. Instead of blindly spending resources just “showing” your advertisement to users, you pay only when you acquire a new customer through the affiliate’s efforts. How cool is that?
Bonus: 100 Best Instagram Influencers for D2C Brands in 2022
Say “YES” to Automation
If you haven’t been living under a rock, you would know that automation is the fuel that propels your marketing rocket above and beyond. Be it leveraging a simple email automation tool or an elaborate CRM tool, automation can do wonders for your marketing efforts and, in turn, reduce your CAC. For example, marketing automation helps reduce the sales lifecycle. You can keep track of your prospect’s activities through cutting-edge tech tools like digital sales rooms and ensure they have personalized content available for their perusal. Automating workflows on these tools ensures there is no delay from your end in the prospect’s buying cycle.
Customer Acquisition Cost is Not Entirely Bad
Yes, you read it right. Customer acquisition cost (CAC) is not always a bad thing. When it comes to growth-stage businesses, costs should be seen as investments. However, not every cost is an investment. How can you differentiate a good cost from a bad one? By looking at the customer’s lifetime value (LTV). It is the revenue you get from any given customer over time. If a customer has a higher LTV, it is considered sensible to spend your resources on acquiring and retaining them.
Easily Track All Metrics with Velocity Insights
We understand how frustrating it can be to track each and every number the company achieves, especially when you do not have a robust tool in place. So, we launched Velocity Insights – a one-stop solution to track all your metrics from various online platforms. Connect your online selling platforms with Velocity Insights in just a few minutes and get a daily business snapshot delivered to your Whatsapp every morning. Here is an article on how you can track your business performance metrics using Velocity Insight in real-time.