Customer acquisition cost (CAC) measures how much money it takes for a business to gain a new customer. It includes marketing costs, salaries, and advertising. CAC is measured during specific periods of time to compare how it goes up or down. It is important because businesses aim to reduce CAC to improve their bottom line.
One way to reduce the cost of acquiring customers is streamlining the sales process. Freshworks CRM is a customer relationship management software that helps scale your business and track metrics like CAC. Freshworks CRM offers customizable reports to automate tracking sales metrics so your reps can focus on selling over generating reports. Sign up for a 21-day free trial.
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What Is Customer Acquisition Cost?
Customer acquisition cost is a lead generation metric businesses use to discover what types of resources they need and how much it costs to bring in customers and grow their revenue, also known as return on investment (ROI). Typically, CAC is calculated by measuring how much you spent on marketing efforts during a given time period and dividing that by how many customers you acquired during that time. Then, compare that figure against subsequent time periods.
How to Calculate Customer Acquisition Cost
For a given time period, such as a month or quarter, you can calculate your customer acquisition cost by taking your total sales and marketing costs and dividing them by the number of new customers you acquire. This gives you the average cost to acquire one new customer. To determine your sales and marketing costs, consider your employee salaries, ad spend, technical costs, publishing costs, and content creation costs.
For example, imagine your company spent $200,000 on sales and $100,000 on marketing efforts in the last quarter. During that quarter, you generated 500 new customers. You’d take the $300,000 you spent on sales and marketing and divide it by 500 to give you an average CAC of $600.
Total sales and marketing expenses / Number of customers generated = Average CAC
To break down the costs and give you a better picture of what goes into calculating the cost of acquiring new customers, there are a few expenses you should consider. As you identify your sales and marketing costs, consider the following categories:
- Marketing costs: The amount your business spends on marketing campaigns, advertising, paid social media, and other promotions
- Sales wages: The salaries and bonuses you spend to compensate your sales team members
- Sales and marketing software: Any paid software your sales and marketing team uses like a customer relationship management (CRM) or email campaign software
- Outsourced or third-party services: These are the costs associated with people outside of your organization, such as a freelance video creator or graphic designer, which you use in advertising or sales materials and campaigns
- Overhead costs: The cost of consumable materials and other expenses directly related to your efforts to gain new customers
Sometimes, it can be cumbersome to try and calculate all of your costs on your own. If it seems overwhelming to attempt on your own, HubSpot offers an excellent free interactive CAC calculator that you can use to help determine your average cost for acquiring new customers.
Pro-tip: It isn’t always easy to tell how your customers found you before they made a purchase. Ask your customers how they learned about you to determine what marketing campaigns and sales strategies are most effective. An easy way to do this is to ask when they make the purchase or to send a survey that will collect the data for you.
Why Is Customer Acquisition Cost Important?
Measuring customer acquisition cost is important because it gives small business owners insight into the overall health of their company. CAC helps businesses understand their level of profitability by comparing the amount of money it takes to attract a new customer to the amount of money that a customer spends purchasing your products or services. Knowing how much it costs to acquire new customers is an important consideration when planning your sales efforts.
Successful companies are always working toward reducing their CAC to make sure they are spending their resources efficiently. The less money you have to spend acquiring new customers and the more money you earn from profits equals more funds you can spend on scaling your business, improving your products and services, hiring the best talent, and more.
For example, if you’re running a successful content marketing campaign that brings in qualified leads, you’ll spend less money hiring additional sales development reps to make cold phone calls. You’ll end up finding leads on your own, and your marketing campaigns will do a lot of the work of filling your pipeline for you.
However, it’s not just marketing and sales that impact CAC―your customer service team has a big impact. If your customers are happy, they will leave positive reviews online and recommend your products and services to friends and colleagues, which reduces your cost of customer acquisition further. Also, the happier your customers are, the less likely they are to leave, which means you spend less on replacing lost customers.
“One of the best ways we’ve found to reduce acquisition costs is to reduce our reliance on paid advertisements by focusing our efforts on owned and earned content. In terms of owned content, we produce a lot of posts for our blog as well as whitepapers and infographics. For this all to work, we grow our own online community actively, which helps us to spread our content to a wider audience of potential clients. We’ve found that these methods are both less expensive and get better results in many cases than paid advertisements.”
―Nikola Baldiko, Digital Marketing Manager, Brosix
The Relationship Between Customer Acquisition Cost and Customer Lifetime Value
Customer acquisition cost is what it costs to initially gain one new customer, no matter how long they keep doing business with you. Meanwhile, customer lifetime value (CLTV) is how much money you earn from a customer for as long as they keep purchasing your products and services. One of the reasons that the relationship between these two metrics is important is that it’s almost always more profitable to maintain an existing customer than to find a new one.
Many businesses focus on lowering their CAC, but it’s just as important to make increasing your CLTV a high priority. That means having the best products and services in the market, a robust customer success program, and excellent customer service agents who respond quickly to solve customer issues.
“The best way―which is often overlooked―to acquire new customers is through your existing customers―and it’s free. In reality, your existing customers will grow your business faster than any other way. Overserve and delight your customers and train your entire staff to continually be focused on ensuring your customers have the best user experience with every interaction with your brand. Focus on the customer and your business will be rewarded.”
―Mike Kawula, Startup Advisor, Mike Kawula.com
How to Reduce Your Customer Acquisition Cost
Every business should be focused on reducing their CAC to be as profitable as possible. While most companies experiment with different methods to reduce their CAC, we’ve listed some of the best strategies for you.
Maximize Website Conversion
You can pay for lots of sponsored ads and social media posts, but if you don’t have a modern, engaging website that’s easy to navigate, it can be difficult to convert customers online. Make sure your website has clear calls-to-action that entices prospects to click, an easy buying process, and responsive design so that people can navigate your website on any device easily. You can hire someone to make your website for you, or you can build one on your own.
“When I first started my business, I spent a lot of money to be included in thick bulky Yellow Pages books, but times have changed. Now, people search online, so it’s important to rank well with search engines. Maintaining a good website and securing positive customer reviews are cost-effective ways to boost your SEO [search engine optimization] ranking and connect with new customers at their time of need. Another cost-effective strategy is networking. There are networking groups in all cities at all membership price points. Choose a group where your potential clients are likely to be that fits your budget.”
―Greg Lemons, Owner, Padgett Business Services
Make Sure Your Strategies Are Sustainable
Whatever strategies you are using to attract new customers, make sure you can do it consistently. For example, if you are using content marketing by writing a blog, ensure you have the time and staff to post and promote blogs regularly to drive consistent traffic. You should be posting at least one to two blogs per week and promoting them on your social media channels.
Create Targeted Acquisition Efforts
You want to get the most out of your money and resources, so make sure you are reaching out to the right audience to get the most bang for your buck. Define your customer persona so that you know who you should be targeting your sales and marketing efforts towards.
For example, if you are trying to reach millennials, you’ll want to have a robust YouTube page since that age group spends a lot of time on that social media channel. If you want to target baby boomers, focus on Facebook ads and posts because that group uses that social media channel the most.
“We reduced our customer acquisition costs this year by changing our Facebook ads targets. They used to go out to the entire United States. We’ve removed expensive states like California and New York, which has decreased our Facebook ad spend by 8 percent. Our customer acquisition has gone down as a result of retargeting. Our website traffic has increased, and now our Facebook, Instagram, and Google Ads retarget our website visitors. We also show ads to people who have previously engaged with our Facebook or Instagram page. We’re now targeting warm traffic rather than cold leads, which has led to a lower cost per lead.”
—Jacob Landis-Eigsti, Owner & Head of Marketing, Jacob LE
Vary Your Acquisition Strategies
Don’t rely on just one or two methods to gain new customers. Doing so creates a risk of failure if one method stops working significantly. For example, if you mostly rely on Facebook to bring in new leads, and it drops suddenly, you put your profitability at risk.
To create robust, sustainable revenue and lower your CAC, experiment with varied acquisition efforts. For example, you can have a lead generation team of sales development reps you make cold calls, a marketing team that manages email campaigns and your social media strategy, and a customer success team that focuses on customer retention and driving referrals.
Provide an Excellent Customer Experience
Finally, your satisfied customers are one of the best ways for you to lower your CAC because happy customers will refer people in their network, friends, and family to your business. HubSpot ― Truth About Acquisition Costs according to HubSpot research, 81% of people trust their family and friend’s advice or opinion more than advice from a business. Even more, 69% of people don’t trust sponsored ads on social media networks.
Focus on fostering an exceptional customer experience after the deal is closed to lower your CAC and increase your CLTV. Make sure you have dedicated account managers who are responsible for meeting each customers’ needs and a support team ready to tackle any technical issues quickly. Then, your customers will naturally serve as advocates for your company, generate case studies, provide testimonials, and spread the word about your business.
Frequently Asked Questions (FAQs)
What is a good customer acquisition cost ratio?
Ideally, companies should aim for about a 3:1 CAC ratio. This means the value of each customer is three times more than the money it takes you to acquire them. If your CAC ratio 2:1, you may want to scale back on your marketing efforts or choose less expensive ones, but if your CAC ratio is 7:1, you should consider increasing your sales and marketing spend because you might be missing out on potential customers.
What does customer acquisition cost include?
Customer acquisition costs include all the sales and marketing efforts you spend to acquire new customers. These are things like staff salaries, ad spend, overhead costs, software costs, and third-party providers fees.
What’s the difference between customer acquisition cost and customer lifetime value?
While customer acquisition cost and customer lifetime value are related, they are quite different. CAC is what it takes to acquire one customer—when they make their first purchase. CLTV is the amount of money any given customer spends during the entire time they choose to do business with you. Creating and maintaining a healthy CLTV is a terrific way to increase your revenue and reduce CAC because happy existing customers will recruit new customers for you.
Bottom Line: Customer Acquisition Cost
Knowing the customer acquisition cost of your business is critical to driving the results you want, such as happy customers and a robust bottom line. Reducing your CAC an excellent way to increase revenue and being able to spend more money on improving your products and services, delighting existing customers, and hiring the best talent in your industry.
Whether you are managing potential leads or engaging with current customers, every small business needs a CRM to stay organized. Freshworks CRM gives you the tools to track leads, organize conversations, collaborate with other team members, and automate sales metrics reports. Sign up for a 21-day free trial.