Calculating Customer Acquisition Cost (CAC): what you need to know

In this article, we’ll explore how to calculate CAC, what factors are involved in calculating CAC, best practices for optimizing your customer acquisition costs and strategies to reduce your CAC. Let’s dive in!

What does CAC stand for?

Customer Acquisition Cost (CAC) is an important metric for business owners to understand. It evaluates the total costs associated with acquiring a customer, such as marketing cost and resources dedicated to customer acquisition.

CAC (Customer Acquisition Cost) is used to measure how efficiently a business is investing capital in customer acquisition. A higher customer acquisition cost may indicate that a business isn't acquiring customers efficiently, while a lower customer acquisition cost helps establish a positive return on investment for businesses that allocate funds for customer acquisition.

Knowing CAC helps business owners evaluate their investment decisions when acquiring new customers; it gives them valuable insight into their marketing efforts and helps them make improvements so they can increase their number of customers acquired without incurring significant expenses.

It's important to look at all your costs across different marketing channels, such as social media marketing, sales and marketing cost, advertising costs, marketing investments, and money spent on other efforts such as loyalty programs - otherwise you won't get a good overview of the total expenses.

What is customer lifetime value (CLV)?

Customer Lifetime Value, or CLV, is a customer relationship management metric that helps business owners measure customer loyalty over time. It takes into account customer spending and how often someone buys which allows business owners to gauge customer willingness and ability to purchase goods and services.

With knowledge of customer lifetime value, owners can optimize marketing spend by focusing their efforts on securing long-term customers and loyal customers. As an important business metric, customer lifetime value paints a picture of a company’s ongoing customer relationships and can help identify trends in customer buying behaviour, allowing businesses to remain competitive within their industry.

Why should I care about my CAC or CLV?

For any business owner, new customers are the lifeblood of their success - and understanding your customer acquisition cost (CAC) and customer lifetime value (CLV) is an essential step to acquiring new customers in an effective and efficient way.

CAC is the sum of money a business has to spend in order to acquire one new customer, while CLV estimates how much a customer will be worth over the course of their relationship with the company. Optimizing CAC and CLV can help a business in countless ways, from improving budgeting decisions to helping craft new strategies on how best to market new products or services.

Understanding these two metrics provide insight into not only how many new customers one should aim for but also where best to set resources in order to maximize returns from new customers acquired. Therefore, taking strides to improve CAC and CLV should be a priority for any business owner seeking success through new customer acquisition.

If you're a SaaS business these metrics play an even more important role. A good strategy to reduce CAC for SaaS companies is by leveraging SEO. Want to learn more about the best SaaS SEO Strategies for 2023? Read our ultimate SaaS SEO guide for 2023 here.

How to accurately calculate your CAC

Understanding and accurately calculating the customer acquisition cost for a business is a key metric for successful long-term growth. First, one should begin by researching some of the current customers and taking note of any associated costs. This can include marketing expenses such as advertisements, networking events or online campaigns. Once an organization has identified all possible current active customers, they should then move onto assessing all total customers. With this pool of data at hand, an organization should be able to more accurately ascertain how best to improve their customer acquisition cost. Doing so can potentially save money in the future as well as increase conversion rates.

There is a relatively simple formula that helps you calculate your CAC:

Customer Acquisition Cost = Total sales and marketing expenses / number of new customers acquired

You should also consider retaining paying customers by improving customer satisfaction, as a satisfied paying customer could potentially converting into repeat paying customers which lowers cost in the long run.

Strategies to reduce your CAC

Having a healthy CAC (Customer Acquisition Cost) to LTV (Lifetime Customer Value) is essential for any business looking to grow profitability. The biggest shift you can make in your marketing to reduce your customer acquisition cost is moving away from only running bottom of the funnel marketing.

Bottom of the funnel marketing

What we mean by bottom of the funnel is that most business out there only ever target and speak to customers who are actively looking for their product or service right now. It's estimated that there's only ever going to about 1 to 2 percent of any market at any given time that are actively looking for that product or service.

That means there are still 98 to 99% of other people out there who may well need what you can offer but they just don't know about it yet or the problem you're solution aims to solve isn't on their radar yet. So your job is to be in a position where you can educate the market to bring that out of market audience to an in-market audience that are actually considering buying your product or service.

You should avoid relying only on (very) expensive ads

This shift in your marketing can make monumental impact on your ability to convert customers and reduce your overall cost per acquisition.

To give you an example this lets say we are a Restaurant owner. So what most restaurants will do is go on Google Search, run some paid ads and target keywords like restaurant near me, restaurant in [city] and they're going to end up paying huge cost per clicks on that keyword, competing with a sea of other noise out there in an incredibly saturated market with zero trust from their customers.

On top of that, they'll likely pay a PPC agency a massive fee of $2,000 - $5,000 a month to manage and optimize those ads wherever possible.

With that in mind, you can imagine how difficult it will be to convert that traffic because they don't know you and there's so many other options out there at that stage whereas if that same restaurant was to take a different approach and maybe target things that people might be searching before they even know or have decided that they want to go to a local restaurant, to find lower cost-per-click keywords or even better incorporate a long term SEO strategy, they can spend $2,000 a month and keep seeing growth in both their organic visibility on Google and in terms of actual business growth.

Once you found informational keywords you can start writing informational blogs that:

1. Help build massive trust and establish credibility
2. Position your company as the go-to in that space
3. You're not competing with a load of other noise
4. You reduce your actual cost as SEO is much more cost effective than running ads

If you're serious about reducing your customer acquisition cost you need to become obsessive with testing and optimizing the customer journey. A simple method is to start using tools like HotJar, Mouseflow or Lucky Orange to analyze visitor behavior on your website and watch back session recordings or heat maps to see where you may be losing customers, where customers may be getting confused or maybe they're filled with doubt because they are not seeing an answer to a particular question they have.

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With that being said, if you can become obsessive with A/B testing and optimizing this over time to start increasing your conversion rate you will again start to significantly reduce your cost per acquisition and increase your profit margin.

When you improve customer acquisition cost, you have to keep testing.

A common mistake you'll want to avoid when you're testing anything whether it be on your website or your advertising campaigns, is that you want to make sure that you're not testing too many different elements at once. For example if you go and change everything on your website from the buttons the text the headings the images the whole look and feel of your website and you see an even increase or decrease in conversion rate it's very difficult to know which of those changes actually resulted in that increase or decrease.

It's obvious that there will be some instances, like if you're going through a Rebrand or you're getting a whole new website built, where it's difficult to avoid making those changes in bulk but generally if you are trying to test and optimize things you want to make sure your staggering the test that you're doing.

Compare your CAC to key business metrics

When you calculate customer acquisition cost (CAC) it's important to remember that this is an important metric to gauge the effectiveness of your business’s marketing efforts. CAC can be defined as the total cost of marketing and sales required to acquire a new customer, divided by the number of customers acquired. Measuring and comparing your CAC to other key metrics, such as lifetime value and retention rate allow companies to calculate their return on investment (ROI). Furthermore, tracking CAC over time helps you remain agile and identify areas that need more focus or where cost-cutting would be beneficial. Understanding how CAC aligns with other metrics also gives businesses greater insight into their overall performance.

If your customer acquisition cost is relatively high, you might have to up the prices of your services or product to increase profitability, unless the LTV is high enough to bank on a long term ROI.

Research your industries average CAC

When researching acquisition costs for businesses in your industry, it is important to start by looking at general trends and averages. Start by searching marketing tactics that other businesses are using to attract new customers. Many times acquisition costs can be hidden among marketing budgets.

Additionally, many online sources have data on acquisition cost comparisons by industry type, which can be incredibly informative and provide helpful guidance when creating a budget for acquisition efforts. Regardless of the acquisition tactic chosen, businesses should consider the costs upfront prior to implementation for an accurate result of customer acquisition cost averages in their industry.

Wrapping up: key takeaways about customer costs

In conclusion, Customer Acquisition Cost is a key metric for assessing the performance of your marketing and sales teams. By accurately calculating CAC in 2023, you will be able to analyze what factors are influencing it and develop best practices for optimizing customer acquisition costs. Additionally, by researching industry averages of CAC and understanding how it aligns with other metrics such as lifetime value or retention rate, businesses can gain greater insight into their overall performance. Finally, through A/B testing strategies and staggering tests when possible, companies can reduce their CAC while simultaneously maximizing ROI on customer acquisition efforts. With these tips in mind start evaluating your current cost per acquisitions today!

Want to learn more about how SEO can help reduce your CAC? Schedule a free strategy call with one of our SEO consultants right away.