Do you know how effective your company’s efforts are when it comes to getting new customers?
While customer care is present in all phases of the buyer’s journey, marketing and sales teams are responsible for attracting and securing those customers. This is when the Customer Acquisition Cost comes in, also known by the acronym “CAC,” which will tell you how effective their strategies are.
In this way, you can determine how positive this index is. In this article you will also find ways to reduce CAC in your company, as this will lay the foundation for the best performance of all the areas involved.
What is the CAC or Customer Acquisition Cost?
A company’s CAC (or “customer acquisition cost”) is the total cost of sales and marketing you need to get a new customer during a specified period. Businesses use this index to know their profitability as it allows them to know how many effective customers they gained with a certain amount of resources.
The total cost of sales and marketing includes all program and marketing expenses, salaries, commissions, bonuses, and overhead related to the process of attracting new leads and converting them into customers.
Successful companies constantly seek to lower the cost of customer acquisition, not only to recoup revenue, but also because it is a sign of the strength of their sales, marketing, and customer service programs.
Think about the following: if your inbound marketing program works correctly, you do not need to allocate additional resources to the advertising budget to generate leads that are not suitable for your company, since the content of your blog attracts high-quality organic leads, 24 hours a day. day. If your sales team captures prospects and maintains a consistent and healthy pipeline, you don’t need to rush to hire additional reps to reach your quota each quarter.
Additionally, if your customer success team manages to maintain and cultivate relationships with satisfied customers, they will help generate new customers by writing testimonials and reviews, presenting themselves as success stories, and recommending your company to their friends and family. If the leads generated by these sources are converted into customers, you will have earned them for free, which will further reduce your Customer Acquisition Cost.
QWhat is the use of knowing the cost of customer acquisition or CAC?
The Customer Acquisition Cost is an index that allows you to:
1. Know the effectiveness of planning and execution of conversion strategies
Keep in mind that customers today prefer to advance on their own when buying, and contact specialized teams until they reach 57% of their journey (so you should be attentive to the best way to talk to your prospects) .
2. You will know better where to concentrate more resources
With this panorama in the relationship between clients and businesses, and having the CAC as a reference of your effectiveness, you will be able to decide in which phases to invest more and why.
3. It will show you the return on investment
You will analyze what is the real performance of your marketing and sales strategies.
4. You will have an element to improve your business
In addition to the fact that you will be able to make changes in your strategies, you will also have a starting point to establish your prices, analyze improvements in product development and offer better services, among other aspects.
Not all business models have the same CAC and a very high CAC is not always synonymous with something wrong: there are businesses that may have a high index at the beginning, but where that investment will have a higher return in the medium term.
It is also possible that your CAC is adequate, but your prices are too low. Thus, a cost of $ 30 would go hand in hand with a product marketed at $ 1,000, instead of $ 100.
How to calculate the CAC?
- Determine the period you want to evaluate (month, quarter or year).
- Get total sales and marketing expenses (including all programs, salaries, commissions, bonuses, etc.).
- Divide that expense by the number of new customers acquired during that period.
- The number obtained would be the acquisition cost for each customer.
Thus, if a company invested $ 500,000 in sales and marketing in a quarter, in which it generated 500 new customers, the cost of acquiring customers would be 1,000.
The most common elements in sales and marketing investment are:
- Investment in advertising
- Employee wages
- Content creation costs
- Technical costs
- Editing costs
- Management times
- Additional advice
- General expenses
What is the formula to calculate the CAC?
Use this formula to calculate Customer Acquisition Cost:
Now you are ready to do the CAC calculation in your own company. Once you calculate it, you can compare it with the data by industry, which you will see later, and evaluate the effectiveness of your marketing and sales teams.
Comparison between Customer Life Cycle Value (LTV) and CAC
Another metric to calculate and analyze in relation to customer acquisition cost is the lifetime value (or LTV) of a customer.
The lifetime value refers to the expected income that a customer will generate during the course of their relationship with a company.
To calculate the lifetime value, you need to add the following variables to the formula:
1. Average value of purchases
To calculate this number, divide the total revenue of your company in a given period (usually a year) by the number of purchases during that same period.
2. Average frequency of purchases
Divide the number of purchases during a specific period by the number of unique customers who made purchases during that same period.
3. Customer value
Multiply the average value of purchases by the average frequency of purchases.
4. Average customer service life
Determine the average number of years that a customer continues to buy your company’s products or services.
You then calculate the lifetime value by multiplying the customer value by the average customer lifetime. In this way, you will get an estimate of the amount of income that you can reasonably expect an average customer to generate for your company during the course of their relationship with you.
What is the ratio between LTV and CAC?
The ratio of Customer Life Cycle Value to Customer Cost of Acquisition (LTV: CAC) shows how much each customer is worth to the business relative to efforts to earn it. One of the keys to profitability and business durability is balancing this ratio.
Therefore, the ratio of lifetime value to customer acquisition cost (or LTV: CAC) of your company is a quick indicator of the value of a customer in relation to the cost of obtaining it. Ideally, the cost of customer acquisition would be recovered in one year, and the LTV: CAC should be 3: 1; In other words, the value of your customers should triple the cost of acquiring them.
At this point, you may be wondering what is a suitable CAC. Actually, this index can vary according to your type of business. To get a better idea, look at average costs in various industries.
Customer Acquisition Cost according to the industry
CAC varies from industry to industry due to a number of factors, including but not limited to:
- Sales cycle length
- Purchases value
- Shopping frequency
- Customer lifespan
- Company maturity
To put the CAC in context, let’s look at a summary of the average cost of customer acquisition based on the industry, as estimated by different publications (in dollars):
- Tourism: $ 7
- Retail: $ 10
- Consumer Products: $ 22
- Production: $ 83
- Transportation: $ 98
- Marketing agencies: $ 141
- Finance: $ 175
- Technology (hardware): $ 182
- Real Estate: $ 213
- Banks / insurance: $ 303
- Telecommunications: $ 315
- Technology (software): $ 395
How to reduce the CAC or customer acquisition cost in your company
There are a number of ways you can improve your customer acquisition cost to bring your LTV: CAC ratio closer to 3: 1. Here are some strategies you can implement:
1. Invest in conversion rate optimization (CRO)
Make sure you have a simple process for visitors to convert to leads, or for leads to convert to customers and make purchases on your site. Optimize your site for form submissions and mobile purchases, analyze the website text and optimize it for SEO to make sure it is as clear as possible and try to create a direct sales process so that your visitors can buy your services or products 24 hours a day, 7 days a week. If your site is an ecommerce, this point is vital.
2. Add value
Increase the value of customers by providing what is valuable to them. Collect their feedback, and whether it’s a product repair, a new feature, or an add-on product offering, do your best to provide customers, both new and potential, with what they ask for, so that they are stay longer.
For this, it is important that you have a clear digital marketing strategy for your business model, both with your website and through your other acquisition channels: social networks, seo, payment, among others.
3. Implement a referral program
If one of your clients recommends your company to a compatible lead in their network who is already interested in learning about your product or service, their CAC will be equivalent to $ 0 if they become a client. Over time, these “free” clients will lower your CAC, which is why creating a referral program that your clients want to participate in is so important.
4. Streamline the sales cycle
Reduce the length of the sales cycle to increase the number of sales you can influence over the course of a year. Use a CRM system and lead acquisition tools to connect with more qualified leads more effectively and thus get not only more new customers but also more potential customers.
Do you need more ideas? Find out how to use content marketing in your customer acquisition strategy.