What is customer acquisition cost?
Customer Acquisition Cost (CAC) refers to the total cost a company incurs to acquire new customers. This metric covers marketing, sales, and related costs. CAC helps companies assess the efficiency of their customer acquisition strategies and ensures they are not overspending on acquiring new clients relative to their Customer Lifetime Value (CLV).
Why is customer acquisition cost important?
CAC is a vital metric for evaluating a company’s marketing efficiency, profitability, and growth potential.
If CAC is too high, it can lead to unsustainable spending and reduced profitability. Understanding CAC enables companies to assess the efficiency of their marketing campaigns, evaluate the return on investment (ROI), and make adjustments. Which marketing activities are best performing? And how can you allocate or redistribute budget to support these activities?
How to calculate customer acquisition cost
To calculate CAC, use the following formula:
CAC = Total Marketing and Sales Expenses / Number of New Customers Acquired
“Total Marketing and Sales Expenses” include all costs associated with attracting and converting customers, such as advertising, content creation, team salaries, and CRM software etc. “Number of New Customers Acquired” refers to the total number of new customers gained within the same period. For instance, if a business spends £50,000 on marketing and sales in a month and acquires 500 new customers, its CAC would be:
CAC = £50,000 / 500 = £100
This formula may vary slightly across industries, especially for companies with long sales cycles, where CAC is tracked over extended periods.
Customer acquisition cost examples and calculations
Let’s consider an example:
1. A retail company spends £15,000 on Google PPC marketing and brings in 1000 new customers during a month. Their CAC would be:
CAC = £15,000 / 1000 = £15
CAC is often compared with Customer Lifetime Value (CLV) and Cost Per Lead (CPL). CLV measures the total revenue a business can expect to earn from a customer throughout their entire relationship with the company, making it a complement to CAC in assessing the profitability of marketing efforts. CPL, on the other hand, tracks the cost of acquiring a potential customer or lead and focuses on the early stages of the customer journey. Together, these metrics provide a comprehensive view of marketing performance and ROI.
Frequently Asked Questions (FAQs)
What is a good CAC?
A good CAC depends on the industry and customer lifetime value (CLV). In general, a CAC that’s significantly lower than CLV is ideal, as it ensures long-term profitability. For example, a common benchmark is to aim for a CLV to CAC ratio of 3:1.
How can CAC be reduced?
CAC can be reduced by optimising marketing efforts, improving lead targeting, enhancing the sales funnel, and focusing on customer retention. By increasing conversion rates and reducing unnecessary spending, companies can lower their overall acquisition costs. A/B testing can also be used to measure various marketing activities and maximise return on investments.
How Taggstar can reduce your customer acquisition cost (CAC)
Whether it’s highlighting essential product information with attribute messaging, or showcasing popular, trending, or bestselling items with real-time social proof messaging, Taggstar converts shoppers through the customer acquisition funnel, helping to reduce the CAC.
Join the growing list of leading global brands & retailers that trust Taggstar to elevate their shopping experiences and drive significant sales lift. Get started today.
