Whether you're in traditional high street shops or diving into the fast-paced world of eCommerce, one goal stays the same: get and keep loyal customers. With so many businesses fighting for attention, finding those loyal customers isn't always easy.
That's where the Customer Acquisition Cost (CAC) can help. CAC is the average cost of acquiring a new customer, from initial contact to them making their first purchase.
CAC covers many things, from paid ads to different marketing strategies and the steps in the sales process. Figuring out your CAC is a key step in understanding how best to get new customers. So, how do you make sure you're tracking CAC the right way? Let's dive deeper into CAC.
CAC, represents the total cost a business incurs to gain a new customer. This isn't just about the money spent directly on digital advertising. It includes every expense related to marketing and sales that played a part in convincing a customer to make a purchase.
Think of CAC as the price tag of winning a customer's trust and interest enough for them to buy from you.
Example: If you spent £1000 on a marketing campaign and attracted 10 new customers as a result, your CAC would be £100 per customer. As you add in more and more customer-acquisition activities, your CAC will rise.
Understanding your CAC is essential for knowing how much you can afford to spend in order to acquire new customers. It's not always straightforward, as there are a lot of factors involved.
Why is CAC Important?
Budgeting and Planning
By understanding your CAC, you can allocate your marketing budget more effectively. If you know how much you need to spend to get a customer, you can set realistic budgets and predict growth.
CAC is critical in evaluating your marketing strategies' return on investment (ROI). If you're spending more to acquire a customer than they're worth to your business (Customer Lifetime Value or CLV), you'll run into financial troubles.
Knowing your CAC can guide you in making crucial business decisions. For instance, if your CAC is high, you might want to focus more on retaining existing customers rather than seeking new ones.
How to Calculate CAC: The Formula
To calculate CAC, you'll need to consider all the costs associated with acquiring new customers within a specific period:
- Advertising and marketing expenses (e.g., digital ads, billboards, adverts).
- Sales costs (e.g., commissions and salaries of salespeople).
- Product costs (e.g., materials used to make your product or service).
- Technology costs (e.g., software used to manage customer relationships).
Once you've identified all the costs associated with acquiring a new customer, you'll need to divide this figure by the number of customers acquired in that time period. The resulting number is your CAC.
For example, let's say your business spent £6,500 in marketing over the course of a month and acquired 25 customers. To calculate CAC, you would divide £6,500 by 25 to get your CAC of £260.
Tips to Optimise and Reduce CAC
A lower CAC means you're spending less to acquire each new customer, which directly contributes to higher profitability. And for many ecommerce businesses, reducing CAC is a key success factor.
Not all customers are equal, and some might be easier to convert than others. Using data analytics, identify your ideal customers and create targeted campaigns to attract them.
Existing customers can be a goldmine for acquiring new ones. By introducing a referral program, you incentivise current customers to bring in new ones, potentially lowering your CAC.
Optimise Ad Spend
Regularly review the performance of your advertising campaigns. Shift budgets from low-performing channels to those with a better ROI. You may be surprised at how much you’re spending on ads that aren’t even generating leads.
By producing valuable content that answers potential customers' questions or solves their problems, you can attract them organically, reducing your reliance on paid channels.
Automate Where Possible
Invest in tools and software that can automate parts of the customer acquisition process, like email marketing automation or chatbots on your website. These simplifications can save a lot of time and effort.
Actively Manage Your Churn
Keep an eye on your churn rate—the percentage of customers who leave you over time. If it increases, look into retention strategies, such as loyalty programs or referral incentives.
Improve Website Conversions
Sometimes, the problem isn't attracting visitors to your website but converting them once they're there. A/B test different elements of your website to improve its conversion rate.
Understand why customers choose you over competitors. This feedback can highlight areas of strength to lean into and areas of weakness to address - and can help inform decisions about future product development and marketing campaigns.
The Relationship Between CAC and CLV
An essential metric to compare with CAC is the Customer Lifetime Value (CLV). While CAC focuses on the cost of acquiring a new customer, CLV represents the total revenue you can expect from a customer over their lifetime relationship with your brand.
In simple terms, if your CAC is significantly lower than your CLV, you're in a healthy position. However, if they're roughly equal or if CAC surpasses CLV, it's a warning sign that you might be spending too much to acquire customers who don't bring enough value in the long run.
To maximise profitability, businesses should aim to reduce CAC and simultaneously increase CLV. Strategies like improving customer service, introducing loyalty programs, or upselling can increase CLV, while the tips mentioned above can help in lowering CAC.
Tools and Techniques to Monitor CAC
In today's digital era, having the right tools at your disposal can significantly simplify the process of monitoring and optimising CAC. Let's explore some tools and techniques that can assist businesses in staying on top of their customer acquisition costs.
Customer Relationship Management (CRM) Systems
Platforms like Salesforce or HubSpot provide businesses with insights into their sales funnel, allowing them to see at what stages they're incurring the most costs and where there might be room for improvement.
Rather than trying to manually track user journeys and purchase data, businesses can analyse visitor behavior on their website or app with the help of integrated analytics tools.
Digital Advertising Analytics
Tools like Google Analytics or Facebook Ad Manager give in-depth data about the performance of online campaigns. You want the ability to hone in on where you're spending the most money and what kind of ROI you can expect. This provides invaluable insight that can help you make better decisions about your customer acquisition strategy.
A/B Testing Platforms
Do you really know what your customers want? A/B testing allows businesses to test different versions of their website or product offering with two different groups of users. With this data, businesses can optimise their offerings based on customer preferences.
Automated Email Marketing Platforms
There are many email marketing tools on the market that will allow you to segment and target customers, as well as send automated emails based on customer behaviour or preferences. This will help to create a more personalised experience for customers and increase conversions.
Feedback and Survey Tools
Utilise platforms like SurveyMonkey or Typeform to gather feedback. Understand what drives your customers to purchase and use this data to optimise your marketing strategies, as these tools can help you collect, analyse and act on customer feedback.
Price Tracking Tools
One of the components of CAC is understanding the cost elements. Tools like BlackCurve can provide insights into pricing strategies, helping businesses to adjust prices to attract and retain more customers.
Pricing Tools & CAC: How BlackCurve Can Help
Effective price tracking allows businesses to strike a balance between what the market is willing to pay and the costs associated with producing and marketing a product. BlackCurve’s price tracking tools allow businesses to monitor market prices and conduct competitive analysis, allowing them to make informed decisions on pricing and promotions.
Dynamic Market Analysis
BlackCurve’s tools allow businesses to continuously monitor competitor pricing in real-time. This ensures that your products or services are always competitively priced, which can attract more customers without increasing marketing spend.
By understanding where your products stand in the market, you can adjust your pricing to either match or beat competitors, potentially reducing the CAC as customers see more value in choosing your brand.
Pricing Elasticity Insights
BlackCurve can provide insights into how small changes in price can affect demand. This concept, known as price elasticity, can be crucial for businesses looking to optimise their pricing for maximum profitability and customer acquisition.
For instance, if a slight decrease in price results in a significant increase in sales, the CAC may decrease as you're spreading acquisition costs over a larger customer base.
Automated Price Adjustments
With changing market dynamics, waiting too long to adjust prices can be detrimental. BlackCurve offers automated repricing based on predefined rules. This ensures that your prices remain competitive, potentially attracting more customers without inflating the CAC.
Don’t Let Your CAC Get Away From You
Customer Acquisition Cost is more than just a metric; it reflects how efficiently a business can attract new customers. By understanding and optimising CAC, companies can ensure sustainable growth and profitability.