How to determine and optimize customer acquisition cost (CAC)

By My Little Big Web

The customer acquisition cost is an essential metric to analyze if you want your business to run smoothly, especially if you run online advertising campaigns.

In this article, the experts at the Montreal web agency My Little Big Web explain the definition of customer acquisition cost (CAC) and 4 ways to optimize it.

What is customer acquisition cost (CAC)?

Customer acquisition cost (CAC) is the budget you invest to convince a potential customer to buy your products or services. This measure is interesting both for you as an entrepreneur and for investors.

With the CAC, you will be able to determine the profitability of your business by looking at the amount invested in your web marketing and sales strategy versus the number of customers acquired as a result of that strategy. You will then be able to use this measurement to optimize your return on advertising investment. If you find that you can reduce these costs, then you will be able to see your profit margin increase.

If this is the case, investors will be more inclined to provide you with additional resources and you can then use the improved profit margins to offer better products and services to your customers in order to achieve a better market position.

How to calculate customer acquisition cost (CAC)

Before calculating the customer acquisition cost, you first have to determine a period to analyze.

Next, add up your total sales and marketing costs. To give you an idea, these costs can include:

Finally, divide the total sales and marketing costs invested to acquire customers by the number of customers acquired over the same period.

 

Customer Acquisition Cost (CAC) Formula

 

For example, if you spent $2,500 on sales and $2,100 on marketing over a period of time and acquired 100 customers, the customer acquisition cost is $46:

((2500+2100) / 100) = 46

4 ways to improve customer acquisition cost (CAC)

There are several ways to reduce your customer acquisition cost. Indeed, you can always optimize your advertising to make it more effective or improve your customer relationships.

Here are the tips from our experts:

  1. Optimize conversion metrics on your website: set goals in Google Analytics and perform A/B testing with new shopping cart systems, for example, to reduce abandonment and improve the homepage, site loading speed, mobile optimization and other factors to enhance the overall performance of your website.
  2. Optimize the user experience: when talking about user experience, we are referring to value, i.e. the ability to generate something that your visitors will enjoy. Gather your customers’ feedback and, whether it’s a patch, a new feature or a complementary product offering, do your best to give customers what they ask for in order to keep them coming back.
  3. Implement Customer Relationship Management (CRM): The majority of companies with regular customers implement CRM. This could be a sales team using a cloud-based sales tracking system, automated email lists, blogs, loyalty programs or other techniques that build customer loyalty.
  4. Implement a customer referral program: If your customer refers you to someone in their network who is already interested in learning more about your product or service, their CAC will be $0 if they become a customer. These “free” customers will therefore reduce your CAC over time. Developing a referral program in which your clients can participate can therefore benefit you.

 

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Customer lifetime value

When looking at customer acquisition cost (CAC), you should also analyze the customer lifetime value (CLV). This is the income that a customer will generate over the course of their relationship with your company.

Here are the metrics to analyze in order to calculate a customer’s lifetime value:

  • Average purchase value: obtain this figure by dividing the total revenue of your business for a certain period of time by the number of purchases made during that period. We can calculate this by averaging the amount a customer spends for each visit during the week.

Average Purchase Value Formula

  • Average purchase frequency: obtain this data by dividing the number of purchases made during the same period by the number of unique customers who made purchases during that period.

Average Purchase Frequency Formula

  • Average customer value: obtain this data by dividing the average purchase value by the average purchase frequency. This will tell you what the average customer spends and how many times they visit your business per week.

Average Customer Value Formula

  • Average customer lifetime: obtain this data by dividing the sum of the customer lifetime by the number of your customers.

Average Customer Lifetime Formula

Next, calculate the lifetime value of a customer by multiplying the average value for the customer by the average life of the customer.

Customer Lifetime Value Formula

This will provide you with an estimate of the revenue that an average customer generates for your company during the course of their relationship with you. In this respect, your company’s LTV/CAT ratio is a quick indicator of the value of a customer in relation to the cost of earning them.

Ideally, your LTV/CAC ratio should be 3:1, i.e. three times the acquisition cost. If it’s closer to 1:1, it means that you are spending too much money on sales and marketing compared to the number of customers you are earning from it. If it is more than 3/1, such as 6/1 for example, it means that you are not spending enough on sales and marketing and that you may be missing opportunities to attract new prospects.

Conclusion

Customer Acquisition Cost (CAC) is a measure that is becoming increasingly used, especially with the emergence of digital-based companies and web-based advertising campaigns that can be tracked.

However, if you need help increasing your online visibility or promoting your products, we welcome you to contact us!