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10 Things To Remember About Customer Acquisition Cost (CAC)

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Written by Flying Saucer Studio

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With deep dives into Branding and Brand Awareness under our belt, this month, we’re turning our attention to all things customer acquisition. Because if there’s one thing we’ve learned through our years of experience working with both startups and larger organizations, it’s that acquiring customers is almost always top of mind.


No matter whether you’re in the initial stages of growing your customer base, or looking to fine-tune your acquisition strategy to boost your bottom line; finding, attracting and retaining customers is an ongoing challenge across all industries. As you kick off, fewer people will have experienced or interacted with your brand, which means sales will be harder to come upon. You’ll likely be spending more money to attract and convert people at first, but with time, you’ll find countless opportunities to experiment and improve efficiency. That’s when you’ll likely become obsessed with your Customer Acquisition Cost – or CAC.


So before you start charting your CAC like a hawk, here are a few things you need to know in order to be smart about your customer acquisition spend and analysis.


1. Defining customer acquisition cost (CAC)

The customer acquisition cost is defined as the cost of attracting, converting and acquiring a new customer/client.  Typically, marketers and internal operations managers define and track CAC in order to evaluate the impact of their content creation and advertisement costs on the startup’s profit margins.


Conversely, investors and companies use CAC as a metric for a startup’s current and potential profitability. Their algorithms consider how much money is spent per new customer, the costs of attracting and converting them, and the existing or potential opportunities for lowering CAC along the way.

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2. CAC vs CPA

Though customer acquisition cost and cost per acquisition (CPA) may sound rather similar, they’re quite different and important to distinguish from one another.


The gist: CAC measures the cost of acquiring a customer. In contrast, CPA measures the cost of acquiring a customer through a particular campaign or channel. Moving from macro to micro, CPA is used to measure the direct impact of a well-defined marketing campaign, and creates an important benchmark in improving overall campaign performance.

 

3. Calculating CAC

The simplest way to calculate CAC? Follow this equation: CAC = MC / CA


  • CAC = customer acquisition cost

  • MC = marketing costs

  • CA = customers acquired


Want to dive deeper? Check out this great breakdown by Neil Patel.

 

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4. Calculating marketing costs in CAC

A lot of startups think that marketing costs (MC) only include the costs of social ads, targeting, and campaigns. But it’s a big misconception. Marketing costs also include the variable costs of things like manpower, outsourced services, hosting platforms, software subscriptions, and more.


Here’s an equation that takes into account a broader understanding of marketing costs:


CAC = (MC + W + S + OS + OH) / CA

  • CAC = customer acquisition cost

  • MC = marketing costs

  • W = wages for marketing and sales

  • S = marketing and sales software

  • OS = outsourced services

  • OH = overhead for marketing and sales

  • CA =customers acquired


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5. How about engineering, customer support, and R&D?

Many startup giants like Dropbox, Slack, and Invision work on a freemium business model – offering free basic services, along with a tempting range of premium offerings. While offering a great opportunity to build trust and engage with their customer base before funnelling them towards an upgrade, these models require a slightly different CAC model.


Since the free offering is an embedded part of the customer acquisition process, it’s important to consider the costs of engineering, research and development, and support involved in maintaining the free service.  

 

6. CAC vs LTV

Though it may seem obvious, it’s important to remember that you’re always aiming to have your CAC stand significantly lower than your customer’s lifetime value (LTV). Sure – you might be attracting a lot of new users through free trials, social media posts, and engaging content, but you won’t be profitable if none of them actually pay for your product or service.


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7. Consider a referral program – they work

 

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ReferralCandy has found that consumers are up to 50x more likely to purchase a product if it’s recommended by close friends, family or influencers. Luckily, 90% of those customers also trust word-of-mouth referrals.

Since referred customers are usually considered to be warm, qualified leads, your CAC will be $0 once they convert. With those kinds of numbers, referred customers will help decrease your CAC over time, so start considering ways you could incentivize and implement a referral program of your own.  

 

8. Add value

One of the most organic ways to improve CAC is to enhance tangible user value. This could mean increasing LTV by offering new products, features or add-ons that customers actually want, or creating new customer experiences that genuinely help and delight.

One of the simplest ways to generate ideas for added-value initiatives?  Dig through your aggregated feedback. Find out what your startup’s missing, and then focus on filling that gap.

 

9. Implement a customer sales management process

There is no shortage of marketing blogs promoting the value of CRMs. And though you may be dubious about their benefits, there’s no denying that having an agile team of salespeople efficiently responding to customer queries and issues can go a long way in improving your customer acquisition rate and customer lifetime value.


In fact, a study by Innoppl Technologies found that 65% of sales reps who have adopted mobile CRM platforms have reached their desired sales goals, while only 22% of reps using non-mobile CRM solutions have hit their targets. So as you take a bird’s-eye view of your acquisition process, try to understand whether your team would benefit from additional context, communication, documentation, speed, and automation. If so, it may be time to start shopping for a CRM.


10. Invest in on-site conversion metrics

Make sure you set goals in Google Analytics and create high-converting landing pages through multiple rounds of A/B split testing. You can also boost on-site conversion stats and reduce your abandoned cart numbers by making sure your entire purchasing process is fast, secure, and easy.  

 

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Article written by Monique Danao

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