Customer acquisition cost formula and tips to improve your CAC

Customer acquisition cost (CAC) is the amount of money an organization spends on advertising and sales initiatives to convert a lead into a customer. According to ProfitWell, CAC for companies increased by approximately 60 percent between 2014 and 2019. However, in recent years, McKinsey & Company reports that the shift to digital sales led to 30 percent higher acquisition efficiency for businesses. Every company wants to decrease the money it spends to acquire new customers, and pivoting to online sales is just one strategy. In this article, learn what customer acquisition cost is, how to calculate CAC, and helpful tips on improving your CAC. What is customer acquisition cost? How to calculate customer acquisition cost (CAC) Customer acquisition cost formula Customer acquisition cost calculator What is a good customer acquisition cost? What factors affect customer acquisition cost? How to improve customer acquisition cost: 5 tips Customer acquisition cost examples What is customer acquisition cost? Customer acquisition cost is how much money a company spends to gain a new customer. It helps businesses determine the return on investment (ROI) of their customer acquisition efforts. CAC includes a company’s spending on the following: Marketing and advertising: employee salaries, subscriptions to tools/SaaS, relevant technology (such as data-collection software or Google Ads), production of any creative elements, traditional and/or digital campaigns, etc. Sales: employee salaries, relevant technology (such as lead generation and email management tools), inventory upkeep, travel expenses, gifts for potential new customers, etc. Importance of customer acquisition cost Your CAC is a key metric because it: Helps improve your marketing and sales efforts Allows you to further analyze your sales journey to determine your budget Provides valuable insight into potential inefficiencies within your sales funnel Proper lead management and sales prospecting techniques often translate into a competitive CAC value. But if a phase of your funnel has bottlenecks—like not enough leads—your company may be spending more than average to move more leads to the next stage. Track acquisition costs by funnel stage to gauge which parts of your sales process have room for improvement. A solid CRM strategy and database are helpful tools when tracking and improving CACs. Ultimately, these efforts will help you understand your sales pipeline metrics and achieve your sales goals. How to calculate customer acquisition cost (CAC) manually The cost of acquiring new customers remains an important sales metric for any company, from scrappy startups to colossal corporations. The simplest way to calculate customer acquisition cost is by adding up all marketing and sales expenses, then dividing that result by the number of new customers gained during a specific period. Explore the four simple steps below. 1. Determine the time period you’re evaluating When calculating CAC, the first step is defining the period you want to assess. This can be either a month, quarter, or year and will help you narrow down the amount of data you need to pull. 2. Add together your sales and marketing expenses Next, take all your sales and marketing expenses during the chosen time period and add them together. 3. Divide sales and marketing expenses by new customers Once you’ve added your sales and marketing expenses, you’ll want to divide that total by the number of new customers you gained during the time frame you’re evaluating. 4. Find your customer acquisition cost After completing steps one through three, you’ll know the estimated cost of acquiring a new customer. Customer acquisition cost formula The CAC formula helps you gauge whether your company’s spending is on track, making it one of the essential formulas for sales teams to know. Example: Company X spent $150K on marketing efforts and $100K on sales initiatives over the last quarter. During this time, Company X acquired 300 new paying customers. That means Company X’s CAC for that quarter is $833: (150,000 + 100,000) / 300 = 833 Customer acquisition cost calculator Taking account of your customer acquisition costs can be tricky. Use our customer acquisition costs calculator to estimate how much you may need to spend to acquire a new customer. What is a good customer acquisition cost? As with most things in life, a “good” customer acquisition cost is relative. To determine whether your CAC is too high or too low, you need to know the amount of revenue coming in from your existing customers. For this reason, the CLV:CAC ratio is a better measure of your business’ health than CAC alone. Customer lifetime value (CLV) refers to the amount of money the average customer will contribute to a company over their entire lifecycle, so the CLV:CAC ratio captures expected revenue. To calculate CLV, multiply your company’s annual revenue by the average customer lifespan (this gives you the revenue earned from one customer). Then, compare it to the initial cost of acquiring that customer. While there isn’t a “right” CLV:CAC ratio, the agreed-upon sweet spot is at least 3:1. This means that, ideally, you spend approximately 33 percent of the average LV on acquiring new customers. What factors affect customer acquisition cost? Like any business metric, there are a variety of factors—within and outside of your control—that affect your CAC. Examples include: Breaking into a new market: You’ll likely have a higher CAC if you’re new to a market. It takes a larger investment at the start to make your business and marketing strategies profitable in a previously untapped area. The age of your company: Established companies have lower CACs because of their tried-and-true strategies, policies, and teams. Newer companies will have higher CACs because they’re still onboarding sales and marketing teams, testing strategies, and establishing their business foundation. There’s always a learning curve when starting a new business, entering a new market, or embarking on a new strategy. In the short term, these endeavors almost universally raise CACs, but that doesn’t mean they aren’t worth doing. Savvy teams will continue to track CAC metrics to ensure their investments are paying off and make adjustments if not. [gated-cta-in-post] How customer lifetime value affects customer acquisition cost Many elements of CLV will affect CAC, including: The average length of time a person remains a customer The rate of customer retention (what percentage of customers come back and buy again) The average amount of money each individual spends over their lifetime as a customer (the amount each customer spends over their lifetime divided by the number of customers) The profit margin per customer (the net income per customer minus the CAC, divided by the revenue from the customer over their lifetime with you) The average gross margin per customer (the profit margin per customer divided by 100 and then multiplied by how much they spend throughout their lifetime) When you have accurate information about your CLV, you can better assess what investments in your CAC are worth it. If your customers consistently come back, it may be worth investing in more marketing to attract new buyers, even if your CAC goes up. How to improve your customer acquisition cost: 5 tips To improve CAC, you must listen to your target buyer. Pay attention to how leads are engaging with you, and implement feedback from existing customers so you’re better equipped to attract more leads. At the same time, monitor your marketing campaign performance to figure out which aspects of your promotions are working. Here are five additional tips to help you lower your customer acquisition cost. 1. Align strategy with customers’ buying preferences Start by aligning your strategy with your customers’ buying preferences. The speed at which businesses create digital or digitally enhanced offerings has increased by seven years, on average. To engage potential customers, companies need to adopt a digital-first mindset—fast. To do this: Give decision-makers online sales autonomy: McKinsey research shows that more than three-quarters of buyers and sellers say they “now prefer digital self-serve and remote human engagement” over in-person sales. Don’t shy away from selling big-ticket products and services online: Try cross-selling online while utilizing strategies like sales process mapping to help plan tactics. Embrace digital communication: According to the Zendesk Customer Experience Trends Report, more customers are turning to social messaging apps—such as Facebook Messenger, WhatsApp, and WeChat—when they seek connection with companies. By meeting leads where they are and providing them with the digital experiences they expect, you can improve your lead conversion rate and, as a result, lower your CAC. Value chain analysis can also help with B2B lead generation and reducing CACs. 2. Share customer feedback CAC depends on your marketing and sales efforts and hinges on the quality of your product or service. When your sales team pitches to leads, they’re more likely to see conversions if they promote a product or service that meets the potential customer’s needs and solves their problems. Attract more leads by sharing valuable feedback from current customers with your engineering and product development teams. To put this into practice, you should: Listen like you mean it: When customers provide input, it’s important to let them know you’re listening. So, if you hear customer feedback in a sales demo or call, pass it along to the teams in charge of building your product or improving your service. Encourage support agents to share feedback: Strengthen your company’s customer-driven culture by encouraging your support team to send valuable feedback—from survey responses to social media messages—to the product team. From there, product team members can determine what additional features would create more value for users. By actively listening to your leads and sharing their feedback with the appropriate team, you’re building trust that pays off in the long run. 3. Analyze available data to maximize ad spending Find success by monitoring performance on advertising platforms to determine which marketing expenses offer the highest ROI. This includes: Tracking acquisition costs per marketing channel: Instead of dividing the total sales and marketing spend by new conversions, isolate the cost spent on a specific channel, such as pay-per-click. Divide that cost by conversions earned within a particular time frame. Watching your CLV:CAC ratio: If you’re spending efficiently, your ratio should remain close to 3:1. If it isn’t close to this figure, it’s time to troubleshoot and optimize. You might create new engagement opportunities for customers, provide loyalty discounts, develop a subscription model, or brainstorm other initiatives. Let your data lead the way, and then optimize your campaigns accordingly. 4. Improve conversion rates Implement a tool like Google Analytics and perform A/B testing to figure out why your customers may not be converting, whether they’re bouncing from a page or abandoning their shopping carts. You can also look into factors such as your page load time and consider how to make your landing pages more engaging to prevent customers from clicking out. 5. Incorporate a CRM Improve customer interactions with customer relationship management (CRM) software. This tool can enable you to build stronger relationships with buyers, meet their needs, and lower your CAC. Using a CRM, you can: Analyze repeat customers: CRM software can uncover details about your customers, such as when they buy, which products they purchase most often, and where they live. This information can help you attract more like-minded prospects. Send out surveys: Most CRM software allows users to email surveys to customers. Gathering this data can help you learn more about your audience's needs and, in turn, reduce CAC. Customer acquisition cost examples Customer acquisition costs can add up in multiple areas across your organization, depending on your strategies, channels, and campaigns. Here are a few customer acquisition cost examples. Promotional examples Some CACs are promotional, such as: General advertising In-store displays Point-of-purchase promotions Email outreach Snail mail campaigns Sponsorships Online activities Events For example, a cookie company sponsoring an event with free cookies would constitute a CAC. In this case, the event and the delicious cookies ideally attract new confection-loving customers. Online expenses Social media costs and website maintenance costs are also considered CACs. An IT company running an Instagram campaign highlighting the benefits of investing in tech insurance is a clear example of a cost intended to convert prospects into customers. Discounts and pricing incentives New client discounts and referral discounts qualify as CACs. Imagine you sell farm-to-customer produce boxes and provide every buyer with a referral code. When a current customer shares that code with a friend who signs up for deliveries of seasonal vegetables, the $20 discount is a CAC. Employee time and wages The cost of your team’s time is an often-overlooked CAC. For example, if an architectural firm pays a member of its staff to bid on designing a new building for a potential client, the cost of their time is a CAC. Installation and supply of equipment Product and service fulfillment often qualify as CACs. One example would be a satellite TV provider installing a satellite on a customer’s home. If not offset by an additional fee, the cost of installation is a CAC. Similarly, an internet company supplying a router to a customer for free would be a CAC. Data and analysis Market research and data analysis are also considered CACs if businesses use the acquired data to identify and better appeal to prospects. For example, money spent by a hair care product company to conduct a case study on which shampoo works best on curly hair (with the hopes of drawing in more curly-haired customers) would be a CAC. Acquire more customers with a CRM The tactics for reducing customer acquisition cost all fall under a larger strategy: creating a high-quality sales process. A CRM system can help you build a seamless sales process and better understand your audience’s needs. With an integrated CRM like Zendesk Sell, you can monitor leads and their movements through the sales funnel, automate emails and data capture, discover new opportunities, and track performance. It will enable you to increase sales pipeline productivity and improve customer satisfaction rates.