Customer Acquisition Cost

What is Customer Acquisition Cost?

Customer Acquisition Cost or CAC is an important metric that is widely used by businesses all over the world. Simply put, it refers to the costs associated with acquiring new customers. 

This concept is beneficial to understand whether your marketing efforts aimed at creating new customers are reaping the desired benefits. 

It also tells you if things are working in your favor or not. If things aren’t, then you may have to relook and revamp it to achieve your goals.

With CAC, online businesses can better measure their profitability. It helps them gauge how much they have spent attracting new customers versus the number of customers they have gained in the process.

As per a recent survey by BigCommerce and Retail Dive, 86% of business owners revealed that they are witnessing increasing customer acquisition costs (CAC). 

Ecommerce businesses need to invest in customer acquisition. Still, it’s essential to monitor your spending, and if you aren’t keeping an eye on this crucial metric, it may just affect your business adversely.

How to calculate the Cost of Acquisition?

Here is the formula used to calculate the Cost of Acquisition.

CAC = (Cost of Sales + Cost of Marketing ) ÷ New Customers Acquired

For an Ecommerce business, the total costs of sales and marketing would include all the costs associated with the advertising and marketing campaigns, the salaries paid to sales and marketing staff, agency fees, and setting up a marketing software.

Also, don’t forget the costs involved in storing, producing, packing, and shipping your items.

Let's look at an example to get a better grasp of this:

Imagine that you run a business selling handbags online, and in December, here is the list of expenses incurred by your online store: 

Facebook Advertising: $200

Website Hosting: $100

Offers & Discounts: $4000

Creative Copy and Designs: $2000

Google Ads: $500

Total = $6800

With your data analytical tools, you have found out that your business has acquired 500 new customers.

Therefore, CAC = 6800 ÷ 500= 13.6

This simply means that the business spends $13.6 to gain a new customer.

Customer Acquisition Cost is closely related to another critical metric called the Customer Lifetime Value (LTV), which calculates how much a customer spends on your product throughout their association with your ecommerce business.

When it comes to CLTV & CAC’s ideal ratio, you should be looking at achieving 3:1. This means that the value your customer generates should be three times the cost involved in attaining them.

Why is Customer Acquisition Cost significant?

Like any other metric Chen managed well, CAC can help your company achieve its business goals. The businesses that fail to track CAC reach the end of the road sooner than others. Measuring your CAC can provide the competitive advantage that you are looking for. 

Here are some of the reasons why calculating  CAC is essential:

  • It helps you understand the costs involved and, in turn, how profitable growth is for your business. If the CAC is much higher than CLTV, it would be challenging to sustain growth as acquiring new customers costs you more than the revenues each customer generates.
  • It helps you determine how much capital to allocate to marketing budgets and sales discounts.
  • It tells you the margin you need to make on each product to sustain your business.
  • It helps improve the marketing return on investment. If an ecommerce business uses many different channels to acquire new customers, calculating CAC can help them identify the most cost-effective one.

How to optimize the CAC?

Now, let’s look at working your way towards getting a favorable CAC. Here are some key strategies that you need to keep in mind:

  • Bring down the cost of goods sold: You may achieve this by reducing your shipping costs and renegotiating discounts with suppliers. Doing so increases your gross margins.
  • Creating value for your existing customers: You can do this by introducing a new product or upgrading an existing one and repositioning it in the market. 
  • Have a CRM in place: A CRM is a valuable tool to keep your CAC low and retain existing customers with proactive customer outreach.
  • Speed up your website: Enhance your website’s speed and ensure that your website is optimized for both desktop and mobile devices.

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