What is CAC?
The customer acquisition cost (CAC) is the metric used to find the total average cost your company spends to obtain a new customer.
How to calculate your customer acquisition costs
Take your total sales and marketing spend for a specific time period and divide by the number of new customers for that time period.
- Sales and Marketing Cost = Program and advertising spend + salaries + commissions and bonuses + overhead in a month, quarter or year.
- New Customers = Number of new customers in a month, quarter, or year
Sales and Marketing Cost / New Customers = CAC
Why reduce customer acquisition costs?
Reducing the costs involved in acquiring new customers gives you the opportunity to scale faster and more efficient. The more you can reduce your CAC, the more sales you’ll be able to generate with your budget and bandwidth. Getting your CAC in check can also increase profitability!
Below are some general guidelines to help you reduce your customer acquisition costs:
Target the right people
The first place to begin is to ensure you’re targeting the right people. Spending valuable marketing and sales dollars on people who are not an ideal fit for your product or service increases waste and your CAC.
Make sure you have buyer personas established. If you’re not familiar with buyer personas, they’re essentially a profile of your ideal client. You can learn more about creating buyer personas here.
It’s important to identify what your persona’s goals, challenges and pain points are. Also, determine the best places to reach your target personas. With this information, you can align everything you do to speak specifically to your persona and ensure you’re resonating with them.
Targeting the right people, in the right places with the right content and context can have a big impact on your customer acquisition costs.
Track the right metrics
You’ll never get a grasp on your CAC if you’re not tracking the right metrics. A couple key metrics to track on a week-over-week and month-over-month basis are:
Cost-per-lead by channel – Pay attention to how much you’re paying for leads from each marketing channel. For example, how much are leads from Google AdWords, retargeting, conferences etc. I’m always surprised by how many companies spend thousands of dollars in marketing and have no idea how much they’re paying per lead from each channel.
CAC by channel – Knowing your cost-per-lead is powerful. Knowing your CAC is even better. But, it’s a good idea to also break down the cost of customer acquisition by marketing channel as well. Some channels might be great at generating good lead volume at a low cost-per-lead, but if only a small percentage convert to sales, then it may not make sense to spend too much budget on that channel. So don’t just pay attention to lead quantity and cost-per-lead, but lead QUALITY as well.
Improve conversion rates
Your marketing team should always strive to improve conversion rates. The higher your conversion rates in each phase of the funnel are, the more leads and sales you’ll be able to earn, for less money.
Some basic conversion rates to focus on are:
Increase referrals and virality
The more “free” customers you can earn the better. This will help you greatly reduce your costs to acquire new customers. Build-in processes and opportunities for current customers to recommend your products and services to their colleagues. You can essentially build this in for EVERY step in your funnel. Some examples are:
Social sharing buttons on your blog and marketing emails
Mentioning it during business emails to customers (maybe in your email signature)
Offer customer incentives and rewards for referrals
Enable sharing EVERYWHERE
Create marketing funnels
When building your marketing and sales structure, do so with the buyer’s journey in mind. You essentially want your marketing funnel to mimic the buyer’s journey. This will enable your sales and marketing team to have more efficient processes that work WITH prospects. The goal is to help prospects educate and sell themselves as much as possible.
To accomplish this you need to clearly define your marketing and sales steps, and be strategic with what happens when, and why. For example, providing prospects with the right content, at the right time so they can easily move through the buyer’s journey with little manual involvement until the appropriate time.
Automate lead nurturing
Increase efficiency by incorporating lead nurturing into your marketing strategy. Let prospects opt-in, at a high level (ie., name and email), so that they join your marketing funnel and begin receiving strategic messages over a period of time (think email drips/marketing automation).
What this helps to accomplish:
Letting prospects move through the buyer’s journey at their own pace, without any sales pressure.
Generates “sales ready” leads.
Keeps your sales team talking to prospects who are genuinely interested.
This will not only save marketing dollars, but employee bandwidth as well.
To acquire visitors to your website, you’re either spending time or money. Let’s face it, not every visitor will convert on their first visit. Instead of having one and done website visitors, you can leverage retargeting. This gives you an opportunity to attract a previous website visitor who didn’t initially convert to come back to your site. Use top-of-funnel offers to bring them back and trade their email for your offer. You can use retargeting ads to promote top-of-funnel offers such as eBooks or whitepapers to maximize initial traffic acquisition and increase conversions.
Another play is to retarget those who are hanging out in the top of your funnel, with middle-of-the-funnel offers. For example, if someone downloaded your whitepaper, you could retarget only those prospects and offer them a free trial or demo. These leads should be higher quality as they’re more educated and have already been exposed to your brand.
Data based optimizations
ALWAYS let data guide your optimizations! Try to get as granular as possible, slicing your data different ways to find opportunities for optimization. For example, if you’re running paid advertising and notice conversion rates are much higher in the evenings versus the day. This data could tell you to daypart your ads and only run them when conversion rates are the highest, during evenings only. Tricks like this are a great way to squeeze more out of your marketing budget and lower your customer acquisition costs.
The bottom line is to be conscious of how much it costs you to acquire customers, monitor associated metrics regularly and optimize as much of your funnel as possible based on the data you build. This will help you scale faster and become more profitable.
For more information on which metrics you should track and why, download our free eBook below.