Customer Acquisition Cost (CAC) is the amount you spend to acquire new customers. It is an important metric to determine your ROI for your marketing efforts for growing your customer base.
It includes all the costs involved in sales and marketing ( like PPC ad cost, marketing and sales team cost, creative cost, marketing tools cost, etc) to attract leads and convert them to make the purchase divided by the number of new customers acquired.
CAC is also known as Cost Per Acquisition. If you’re curious to learn more about CAC and how to reduce customer acquisition cost, this article is for you.
Add all the components of your investment for getting customers and divide it by the number of customers you have acquired in that given period to find your CAC.
Here’s an example.
Say company X spends the following components for customer acquisition.
Salaries of their sales and marketing team - $20,000
Travel expenses - $300
Ad spend - $500
Tech stack - $1000
So the total spend is = $21,800
Now say the company has enabled all these expenses for a month. And if the company has acquired three hundred new customers in this period, then the CAC is = 21,800/ 300, i.e., $ 72 for that period.
LTV is defined as a customer's lifetime value. It is the predicted revenue that a customer will generate for your business throughout their relationship with your brand. Businesses use LTV to CAC ratio to determine their expenses towards sales, marketing, and customer service.
An LTV:CAC ratio gives a quick overview to understand how much customers are worth compared to how much the business is spending to acquire them. An ideal LTV:CAC should be 3:1 which means the value of the customer should be three times more than the cost you are spending to acquire them.
CAC is an essential marketing metric for your business. If your cost to acquire a customer is more than the average revenue generated per customer, you are in trouble. It translates to spending more to acquire a customer than you are generating revenue from that customer.
So knowing your CAC figures and how to reduce customer acquisition cost are essential to ensure that you are generating sufficient revenue to incur the cost of running the business successfully.
The marketing and sales team has to put their efforts into bringing the result (generating qualified leads), now you need to know how to read the CAC data, when to read them and how to act on them.
Your goal is to keep your LTV:CAC ratio as close as possible to 3:1. If LTV:CAC ratio at 1:1, it means you are spending as much as on acquiring customers.
If the ratio is 6:1, it means you are not spending enough on your marketing and sales and missing out on opportunities.
“Reading the data can tell what strategies and efforts are working to achieve the target. Knowing what is working and cutting down on what is not working is essential to reducing the customer acquisition cost. Having a system in place that helps understand the organization's budget, efforts, and KPIs is critical. Data plus data-driven decisions are the answer to high CAC.” — Mike Perez, Head of Growth Marketing at spacelift.io
“There are a number of different ways to bring your CAC costs down, you need to look at your channel data, conversion rate data, and life lifetime data individually and prioritize tasks based on it,'' says Rhydian Ball, Digital Strategist at Station Rd Marketing.
Building a partner program is a good strategy to minimize the CAC. Having another company to help you share the marketing or service costs works well to lower the CAC. Building legit partner programs means they can promote you through their marketing channels, help you retain customers, and even help you sell because your growth means their growth.
Here’s an example of how Spotify and Hulu formed a successful partner program. Spotify Premium subscribers in the US can access a Hulu subscription too for free as part of their monthly premium subscription. This has been a win-win for both the brands as Spotify can now attract more premium subscribers while Hulu, a growing brand, gets more eyeballs from its users.
Leveraging marketing automation can be another way to reduce customer acquisition costs. While you need to make an initial investment at the beginning of the campaign, it can be an effective but economical solution over time.
For example, when a visitor downloads a free eBook from your website, you can use a marketing automation tool like HubSpot to send them follow-up emails to nurture the leads.. Providing value to customers eventually makes them come back for more, nurturing campaigns that give away useful content or downloadable assets will enable them to stick along longer.
Marketing automation can be highly targeted and thus give a better conversion rate, reducing the cost of maintenance and other overhead expenses.
Content marketing, when done right, can be beneficial to your business in many ways. Besides educating your customers with informative posts, you can become a thought leader by talking about your experience, telling stories of your brand, sharing opinions of industry experts etc. Focusing on building content that solves the problem for your target audience has dual benefits.
Content marketing can direct visitors to your site without spending much, while also working as a great tool to build your brand.
Drift’s exemplary content marketing strategy is a great example. Drift’s biggest advantage lies in how they have positioned themselves in the eyes of their prospects. It is seen as a company that provides valuable and relevant content to their users.
It uses its conversational marketing tool to serve users what they want. Based on a user’s interaction with a piece of content and with the website, Drift’s chatbots trigger personalized recommendations.
Based on the user behavior and the stage they are in the buyer's journey, Drift’s chatbots route them to premium resources that can be further explored or set up a conversation with sales.
. Leveraging a content-driven SEO strategy and publishing frequently can help you attract more leads without investing too much in pay per clicks.
Test what your customers like and deliver by A/B testing and optimizing your landing pages. Better UX design can be directly linked to higher customer satisfaction which indirectly translates to higher sales.
By A/B testing their landing pages, marketing teams can assess what the customers want to experience and optimize their pages accordingly. A/B testing is a great way to check how minor changes can increase click-through rates.
Here is how the rockstar team at Copyhackers tested out two different versions of the homepage of antiperspirant - SweatBlock by optimizing the copy and got a 108% lift in revenue.
It said “We started by eliminating the “muddle” with the help of a simple messaging hierarchy and yup, our copy more than doubled revenue attributed to the home page. We turned vague copy into specific copy."
Here are the two versions of the homepage for you to look at - can decide for yourself which one was the winner ? ;)
Version B of course.
However, be mindful to test not more than one or two variables at a time to introduce change in a small fraction instead of overarching changes that could backfire.
Having an efficient and effective sales funnel helps you manage your customer’s buying journey in a better way. An improved sales funnel can reduce your CAC significantly.
For example, if you know why your customers are dropping a purchase, you can improve it to minimize your CAC. Data analytics software comes in handy in such scenarios to optimize the sales funnel.
It helps you identify the underperforming areas to fix them and optimize your sales funnel. Use your CRM effectively to understand a predictable pattern of your customers to serve them better.
While building a brand is essential to pull in customers, it may increase your CAC if you’re too focused only on brand building because it doesn't pay immediately on your sales.
However, brand-building will pay off in the long run. At the same time, marketers also need to focus on short-term sales.
So, marketers need to strike a balance between their short-term and long-term marketing initiatives.
Brands like Adidas are striking a balance by creating a marketing mix. As a general rule of thumb, Adidas follows a 40:60 strategy where they invest 60% of their efforts into brand building and 40% into short-term sales.
Leveraging social media can reduce your CAC significantly. Social media can help you grow your brand organically, thus reducing the cost that you would have spent on brand building and spreading brand awareness.
Here's an example of how IBM leverages social media to communicate its history and legacy in a compelling manner. This campaign helps IBM to spread its brand awareness which ultimately lowers the CAC for brand building.
Shopify is another B2B brand that has found immense success with its video marketing strategy.
Dove is another brand that has been using social media to organically grow the brand. Dove’s latest social media campaign Project #Showus is built around its values of inclusivity and diversity. The brand encouraged women across the globe to create their photo library and smash beauty stereotypes. Like Appl, Dove also leveraged the power of user-generated content.
As Anirudh from economize add, retargeting customers had been an excellent way for them to minimize their CAC.
As he says, “ We performed an outbound email campaign. The open rates were excellent, but response rates weren't very high. After people visited our landing page, we retargeted them with ads to increase awareness of our brand. Visitors started responding back to our emails (without following up in some cases) when they saw the same logo again, increasing the demo conversion rate. Sales timelines decreased as well. I recommend companies begin with retargeting with landing page audiences before starting with paid social ads or paid searches.”
Know that marketers will not benefit from a CAC without proper data. Continuous monitoring and efforts on different activities like building a strong partner program, optimizing content, social media branding, etc can help in improving the CAC over time. A high CAC can drain the profitability of the business and so brands should always focus on keeping the CAC low.
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