Customer acquisition cost (CAC) is an important business metric that is used by businesses to determine the resources needed to attract new customers in order to ensure business growth. Every business is constantly looking to reduce its CAC in order to recoup revenue. It is important to understand what CAC is, how to calculate it, and its significance to your business. How do you calculate the CAC for your business? The formula below shows how you do it:
To calculate your customer acquisition cost, you will have to divide the total costs spent on acquiring new customers by the actual number of customers that have been acquired. The total cost includes both sales and marketing costs. These costs can be broken down in the following way:
- Spending on ads
- Costs spent on content creation
- Employee salaries
- Technical costs
- Production costs
- Inventory upkeeps
- Commissions and other overheads
CAC has the potential to determine how you shape and price a product. It also helps a business to understand which strategies are profitable to it. Basically, CAC affects the following:
- Return On Investment (ROI)
- Customer Lifetime Value (LTV)
- Monthly Recurring Revenue (MRR)
Most businesses focus only on the overall revenue and forget to take into account how much they are spending. This can mask the results and affect your profit margins. Besides, you wouldn’t be able to know whether your marketing strategy is effective or not. That is why you should prioritise CAC. It helps to put things in perspective, plan out the marketing expenses, and estimate the revenue you will get from it.
How to reduce your CAC
If you want your business to generate more revenue and grow, you will have to spend less on acquiring customers. The following strategies can help your business to lower its CAC:
Attract more qualified leads : You need to attract high-quality leads if you want to get value for your money. High-quality valuable leads increase your conversion rates and as a result, lower your CAC. You can leverage automation tools that enable you to create effective landing pages and web forms that can collect reliable data on qualified leads. You can also get qualified leads by investing in pay-per-click ads such as Google and Facebook Ads.
Speed up your sales cycle : The longer you take to convert generated leads to sales, the more you will spend and, therefore, the CAC will be higher. Shortening the sales cycle will enable you to lower the accumulated spending and increase your return on investment. You can use marketing automation tools to nurture your leads and take them through the sales funnel in the shortest time possible. In fact, marketing automation will be very helpful in speeding up your sales cycle. Marketing automation tools will allow you to score and track leads, do segmentation, and offer faster responses and follow-ups for an accelerated sales cycle.
Employ referral strategies : One of the greatest strategies for acquiring new customers is through referrals. It is estimated that 65% of new businesses that companies get are from referrals. If you hack how to ask existing customers for referrals, you would be able to significantly lower your CAC. Having an effective referral program would enable you to get a high volume of quality leads; at least 60% marketers believe so. Your chances of retaining customers acquired through such programs are also higher.
Increase your LTV by reducing churn : Churn refers to customers who leave your business. The higher the rate of churn, the lower your customers’ lifetime value (LTV). If you are able to increase the LTV, you would be able to have more revenue streaming in from your customers and consequently spend more. You can increase your LTV by putting in place customer retention strategies such as providing real-time assistance and generally ensuring positive customer experience.
There are other strategies such as increasing the team’s productivity and improving the conversion metrics that you can use to lower your CAC. Contact us for effective digital marketing strategies that are guaranteed to lower your CAC and boost the revenue growth of your business.
We help you to revise every step of your funnel so you can see where costs could be lowered and optimized. Get in touch with us to save your ad spend which you have spent till now.