Learn the Customer Acquisition Cost (CAC) Formula (And How to Improve Your CAC)
When you’re investing in marketing strategies to obtain new customers, you want to ensure that you have a balance between how much you spend to get customers and how much they spend in return.
By using the customer acquisition cost (CAC) formula, you can figure out how much it costs your business to acquire customers. Keep reading to learn about the CAC formula and how you can decrease your customer acquisition cost.
What is customer acquisition cost?
CAC is the cost of convincing potential customers to buy a product or service from your business. You put money into different marketing strategies in hopes of getting shoppers to buy products from your company.
What is the customer acquisition cost formula?
So, how do you calculate your customer acquisition cost?
The CAC formula looks like this:
Cost Spent on Acquiring Customers / Number of Customers Acquired = CAC
For example, if you spent $200 and obtained 100 customers, it would look like this:
$2,000 / 100 = $20
So, it costs you $20 to acquire a new customer. Ideally, you would want that customer to spend over $20 for your business to obtain a profit.
Why is CAC important?
It’s important to calculate these costs to ensure that you’re not over- or underspending to obtain leads and conversions. Understanding how much it costs to acquire a new client can also help your business understand the return on investment (ROI) of different strategies.
How to calculate customer acquisition costs accurately
When you’re using the CAC formula, there are four critical factors to take into consideration when you’re trying to figure out how to calculate customer acquisition costs:
1. Understand the time-to-ROI for strategies
The first factor is the type of strategies you’re using for your acquisition and marketing campaign. Not every technique produces results at the same rate as others. You must consider this when using the customer acquisition cost formula.
A method like pay-per-click (PPC) advertising will produce quicker results than a technique like search engine optimization (SEO). SEO can take months to start showing results, whereas PPC shows results immediately. This doesn’t mean your SEO strategy isn’t working. It just needs more time to drive results for your business.
SEO is still beneficial to your business. It helps your company save money because it doesn’t cost you anything when people click on your organic listing. The CAC will be lower, but it will take time for it to be fully effective.
2. Know the difference between the CAC formula and cost per acquisition (CPA) formula
Many people use CAC and CPA interchangeably, but these two are different.
CPA focuses on acquiring something that is not a customer. This includes registrations, activated users, and trials. It doesn’t focus on users making a purchase-type conversion, but rather, converting by joining an email list or registering to download a free ebook.
It’s important to keep these formulas separate because they measure different actions.
CAC focuses on converting customers that turn a profit for your business, while CPA focuses on specific actions your audience takes that don’t include purchases. Ensure that you keep these formulas separate from one another!
3. Consider campaign durations
When you’re using the CAC formula, factor in the length of your campaign.
Many CAC formulas don’t consider the time it takes to acquire a customer. When you’re using the formula for calculating cost per customer acquisition, you must factor in the time frame in which you spent money on marketing and customer procurement.
So, what does this mean?
Imagine that you’re a web design company, like Wix. People can create a custom website for free with some limitations. This is great for a small business that’s just starting and needs to build a basic website.
Now imagine that this same business starts getting more popular and grows. It needs to expand its site, but the current free plan isn’t enough. At this point, the company will pay for a monthly subscription to get access to more features to expand their site.
In this case, it took two months for Wix to get a conversion.
You must take the average turnaround time for a conversion into consideration when you’re calculating your customer acquisition costs. Just because someone doesn’t convert within the first week doesn’t mean your marketing efforts are unsuccessful!
4. Include every customer acquisition cost
Your marketing and sales costs include more than your marketing campaigns. Other factors come with acquiring customers.
For one, you must include the expenses of people working on your campaign. This includes costs like salary and healthcare benefits. These come at a price to your company because it’s expenses you have to pay to have people work on your campaign.
In addition, you must factor in the cost of overhead, too. Your costs should include expenses like rent, equipment, and marketing tools. These are all additional costs that are part of your marketing and sales costs.
Besides these additional costs, consider looking at your Lifetime Value (LTV) and CAC ratio.
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4 ways to lower your cost of customer acquisition
Now that you know how to use the CAC formula, let’s look at ways that you can reduce the cost of customer acquisition.
1. Know your industry
First and foremost, you need to know your industry to know how to calculate customer acquisition costs.
Your industry influences your CAC. Some markets have a higher CAC because it requires more time and effort to nurture these customers towards conversion, but this investment is worth it because the conversions outweigh the costs.
Don’t compare yourself to other sectors. Some sectors will have a lower CAC solely because it costs less to nurture those leads into buying.
Let’s think of it like this: It takes less marketing to convince someone to buy a book than it does to buy a car. A book costs less, so it’s easier to convince someone to spend $20 after marketing to them for a few days. On the other hand, it may take you two to three months (or more) to convince someone to purchase a car, but the purchase is worth thousands of dollars.
By knowing your industry, you’ll create a campaign that’s better for your business. You’ll know how much you should spend to acquire customers, which will help you create a more cost-effective campaign.
2. Invest in conversion rate optimization (CRO)
If you want to earn conversions, you must make it easy for your audience to convert. Be simple and straightforward about how visitors should become customers.
To earn more conversions, ensure you optimize your site for both desktop and mobile conversions. Regardless of the device, your audience should easily be able to convert.
You can test landing pages, site speed, mobile optimization, and other factors to ensure that conversion is easy for your audience.
If you don’t have the time or resources to test in-house, you can invest in CRO services from a digital marketing company.
3. Enhance the value
If you want to earn conversions, you must show your audience the value in your products or services. There are dozens of other businesses that offer similar products and services. You must show your audience why yours is the best option for them.
Ensure that you detail the perks of buying your product or using your services over another company. This can be additional features or included services that sweeten the deal for your audience. You want to show your audience how these features will benefit them by appealing to their emotions.
Your audience wants to know what they’re getting and how your business fulfills their needs. At WebFX, we have a team of over 500+ experts that can help you show your audience the value of your business.
4. Implement a customer referral program
Customer referral programs are crucial to lowering the cost of customer acquisition. They’re also an extremely cost-effective way to obtain new leads.
You already have people who love your products or services and buy them. These are potential ambassadors for your brand.
Creating a referral program allows you to obtain new leads. You can incentivize your current customers to refer their friends and family to your business. They can reach out to people they know would like your products or services.
When people refer others to your business, it costs very little. It may only cost as much as sending an email. This is a very cost-effective way for you to obtain new customers for your business.
We foster and form long-term partnerships so that your business has long-term results.
Over 90% of WebFX clients continue partnering with us into year 2 of their campaign.Hear from Our Happy Customers
Start using the CAC formula to help your business grow
When you know how much it costs to acquire customers for your business, you can better plan your marketing strategy. You’ll obtain more valuable leads for your company that will turn into conversions.
At WebFX, we have years of experience lowering marketing costs to help you get more for your business. In the past five years, we’ve driven over $6 billion in sales and over 7.8 million leads for our clients. When you partner with us, you can count on our team of experts to drive valuable results for your business.
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