Customer acquisition cost (CAC) is the average amount that a business needs to spend to gain one customer over a specific period. You can easily calculate your CAC by dividing the amount spent on acquiring customers by the number of customers acquired in the period the money was spent. Generally, these costs are linked to marketing expenses, including advertising, publishing, and salaries. In simpler terms, CAC indicates how much your customer base can grow while continuing to make a profit.
SaaS companies or e-commerce platforms also consider the customer lifetime value (CLV) when measuring profitability. A “cheaper” acquisition doesn’t necessarily mean that it’s profitable for the business. CAC is only beneficial for the company if the revenue generated is higher, or if the customer relationship is long-term. If the cost has been low to acquire a customer yet they make a one-time purchase, this won’t be profitable for a business. Luckily, there are plenty of best practices to use as reference, so you can successfully manage growth.
This article will cover:
- What is Customer Acquisition Cost (CAC)?
- Why is calculating CAC important?
- What are the best practices when it comes to a company’s CAC?
- Optimize site performance
- Enhance user value
- Implement a Customer Relationship Management (CRM) system
- Update your CAC metrics
What is Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) is the amount of money spent by a company to acquire one customer. The basic calculation is to divide all acquisition costs by the number of customers gained during the period the money was spent. Let’s say your business offers SaaS solutions to the health industry. You’ve spent $1,000 on marketing expenses last year to gain a total of 250 subscriptions, resulting in a CAC of $4.00. This means that each customer has cost you $4.00 to gain. The question remains, is this good or bad?
The fact is, we still don’t know. This is because we’re missing out on key information related to how much money a customer has generated for your company over that period. If we stick to the previous result, CAC= $4.00, where customer A has subscribed to the Basic Plan of $250/year and customer B to the Enterprise Plan which increases to $1,500/year, then customer B is more profitable for the company.
In other words, CAC metrics should be used for decision-making only when analyzed in comparison with other metrics such as customer lifetime value (CLV). This metric measures the average customer’s revenue generated over their entire relationship with a company. Let’s say that customer B decides to cancel the plan in the following year and customer A upgrades to Premium, $550/year. The value of each customer has radically changed.
Why is Calculating Customer Acquisition Cost Important?
In addition to guiding a business on how they should spend their money, the CAC metric is also used by investors who are looking to minimize risk. It helps them to understand the company’s profitability by comparing the overall revenue and the customer acquisition cost. Usually, you’re more likely to receive an investment in your company if you have proof of good CAC metrics.
Not only is CAC important for investment purposes, but departments within your company such as marketing and sales can use these metrics as an opportunity to increase profit margin. The CAC metric is an indication that you may need to cut costs from ad campaigns, salaries, site maintenance, etc. Although the source may vary according to your marketing strategy, it will certainly make you rethink your budget.
The importance of calculating your CAC is directly proportional to how reliable you make it. You might need to tweak the figures or make variations to the equation to adapt to your current expenses. Considering that acquiring new customers costs five times more than retaining customers, it’s useful to learn from the best practices adopted by successful companies.
What are the best practices when it comes to a company’s CAC?
How and where you spend your budget depends on the type of business. Having said this, here are four key practices that any company can implement to lower their CAC or increase their profitability.
Optimize Site Performance
If you’re an e-commerce or subscription based model, then you’ll definitely need to make sure that purchasing your product is an easy task for potential customers. However, if you want to reach optimum levels of customer satisfaction, you’ll have to make sure that your site performs correctly overall. Site performance metrics include site speed, call-to-actions (CTAs), or the time users spend on your site. CTAs are a way to ensure conversion, i.e. when a prospect becomes a customer. As a SaaS company, your landing page might offer a Free Trial and this will only lead to conversion if your CTAs are effective. Don’t forget that nowadays most users buy products via smartphones, so you’ll also need to optimize site performance for different devices and browsers.
Enhance User Value
User value refers to how potential or existing customers perceive your product. Your job is to monitor and analyze this perceived value so that you can increase customer satisfaction and experience if needed. For example, you might have noticed that the CAC has increased, whereas the CLV has decreased for a particular product; this is a clear sign that you need to act as a business. You will have to explore further to see if the user doesn’t like this product or doesn’t understand it. Whichever the case, you’ll have to implement tactics to showcase the value for users.
Implement a Customer Relationship Management (CRM) strategy
No matter the nature of your business, implementing a CRM strategy is a must nowadays. A CRM platform combines data from all departments to track sales, automate distribution lists, manage loyalty programs, etc. The aim is to increase business revenues and profit by cutting costs and establishing solid relationships with customers. Sound familiar? Metrics such as CAC or CLV become key and have a direct impact on redefining your business strategy.
Update your Customer Acquisition Cost metrics
Remember, if your strategy is successful, then your customer base should grow. However, if you’re a SaaS company, you might be more interested in increasing your retention rate, rather than your acquisition rate. Let’s not forget that happy and satisfied customers are the best form of advertising for any business.
As with any type of metric, CAC becomes a more powerful indicator when analyzed in context. Let’s not forget that CAC is simply telling you how much you currently spend on average to gain one customer, but it can only be interpreted as good or bad when compared to other metrics such as CLV. As you’ve seen there are best practices that you can start implementing right away to reduce your CAC, such as optimizing your site performance or implementing a CRM strategy. A platform such as FROGED can help you establish long-term relationships with your customers by creating product flows, which allows customers to engage with your product or anticipate their needs through in-app messages and education tools.
If you’re interested in learning how to increase user engagement and ensure CRR using FROGED, read How to Improve User Engagement and Retention Using Product Flows.