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One of the more crucial business indicators that all companies need to be aware of is customer acquisition cost (CAC).
As a founder or marketer, it's essential to understand how much it costs to acquire a customer. Knowing your Customer Acquisition Cost (CAC) is crucial to effectively scaling your business.
In this blog, we'll dive into what CAC is, how to calculate it, ways to improve it, and provide examples to help you understand better.
The term "customer acquisition cost" describes the cost of bringing in new customers. This metric is essential to your startup since it allows you to evaluate how effectively you used time and executed to your overall marketing activities. Your business should focus on figuring out how to reduce CAC expense while increasing the number of new customers you attract through all of your marketing strategies.
Customer Acquisition Cost, commonly known as CAC, is the cost a business incurs to gain a single customer. It includes all the expenses related to marketing, sales, and advertising. In simpler terms, the total amount of direct and indirect expenses to get a new customer on board is CAC.
Knowing how to calculate CAC is essential for businesses to evaluate if their marketing and sales strategies are successful.
To calculate CAC, you need to know the total amount spent on sales and marketing efforts during a specific time frame, and the total number of customers acquired during that same period.
CAC - (Cost of Sales + Cost of Marketing) / New Customers Acquired
Example 1: A Software Firm
Assume a CRM software startup invests INR 30,000 in a marketing campaign. Following the campaign, the company discovers that 1,200 new customers signed up for their service.
The company expects to spend an extra INR 50,000 per year on technical and production costs for these new customers.
This software company's CAC would be:
CAC = (50,000 + 30,000) ÷ 1,200 = 80,000 ÷ 2,000 = $40
This means that the software firm spent 40 on each new customer
CAC is significant for a number of reasons:
By adding together all of the costs involved in acquiring a new customer, the customer acquisition cost is computed. A complete information of your expenses and overall spending is necessary for this. Remember that a CAC estimate takes into account all marketing activities, including marketing expenditure and sales team salary cost as well.
Imagine you wanted to calculate your cost per new customer over a certain period of time. You would start by listing all of the costs incurred over this time period to bring in new customers. The cost of marketing staff, the price of advertising campaigns (while taking into account the conversion rate of any campaign), and the cost of any campaign's creative charges are a few examples of what this could be. It would be necessary to add up all of these costs. Keep in mind that only new customer fees are covered here; expenses relating to client retention are excluded.
The whole cost would then be divided by the total number of consumers, and you would knowhow many new clients you brought in.
There are various techniques to decrease your customer acquisition costs overtime. Some of these are fundamental to how CAC is determined. Your CAC would reduce if you cut back on marketing costs or gained more clients.
While a high CAC may not always be a terrible thing, it's essential to keep it in check to ensure your business is cost-effective. Several ways can help you improve your CAC; we have listed some below.
Focusing on a particular target audience rather than casting a wide net is one way to reduce CAC. This approach ensures that you're only spending money on people who are most likely to convert into customers.
Word of mouth is one of the most effective marketing tools, and it doesn't cost much. Encouraging your existing customers to refer your product/service to their friends and family can help reduce CAC and improve conversions.
Your website is often the first interaction a potential customer will have with your business. Thus, it's essential to ensure your website is easy to navigate, loads quickly, and is mobile responsive.
Offeringing a free trial or sample of your product/service may seem costly upfront, but it can improve conversions and reduce CAC in the long run.
Upselling and cross-selling existing customers is often less costly than acquiring new ones. By identifying and capitalizing on opportunities to increase revenue with existing customers, you can reduce CAC and improve customer retention.
Although customer acquisition cost and customer lifetime value (CLV) may have slightly different definitions, it is crucial to comprehend how these business measures interact.
The sum of money that paying customers give your business over the duration of their relationship with you is known as the Customer Lifetime Value (CLTV) of a customer. These metrics can be adjusted to be calculated in a variety of ways, such as over an extended period of time (like a sales cycle), the average customer's purchase price, or the average customer's lifetime spending. Your CLTV is expected to rise as a result of lower churn, higher customer valuation, and more customer happiness. The calculation time should be in line with your business model, which could have varied requirements.
To increase your profit margin and your overall marketing efforts, lowering your customer acquisition costs is crucial. It is an essential tool that you can use to figure out your overall return on investment and shows you how much money you need to spend to raise your recurring income.
In conclusion, knowing your CAC is essential to the success of your business, especially when scaling up. By following the methods outlined above, you can effectively reduce your CAC and improve your customer acquisition strategy.
As a startup founder, understanding how to calculate and improve your CAC is crucial to reducing costs and increasing profitability. Keep your target audience in mind, invest in referral marketing, optimize your website, offer free trials, and upsell current customers to reduce CAC and accelerate growth.
At Jordensky, we specialize in accounting, taxes, MIS, and CFO services for Startups and growing business and are focused on delivering an experience of unparalleled quality. When you work with Jordensky, you get a team of finance experts who take the finance work off your plate – ”so you can focus on your business.”
