Every Monday we publish education on key business metrics you can use to operate and scale your company. This week we cover Customer Acquisition Cost (CAC).
CUSTOMER ACQUISITION COST (CAC)
Customer Acquisition Cost (CAC) is both a marketing and financial metric. It represents the cost to attract and convert a prospective customer or client. A business owner should aim to reduce their CAC over time to increase profitability and improve efficiency.
With any metric, trends are more helpful than a single data point. In the case of CAC, you should determine your baseline value by selecting a recent historical period for your business. Once you have this baseline, set a goal to reduce your CAC by a certain dollar amount or percent going forward.
Calculating Customer Acquisition Cost:
Divide total marketing and sales expense by the number of new customers acquired during the same period.
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- Q1 Marketing Expense: $50,000
- Q1 Sales Expense: $100,000
- New Customers Acquired in Q1: 200
- CAC: ($150,000 / 200) = $750
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In this example, it costs the company an average of $750 to acquire one new customer.
COMPARING TO CUSTOMER LIFETIME VALUE (CLV)
CAC is most useful when comparing it to the value a customer brings to your business. Customer Lifetime Value (CLV) represents the amount of revenue the average customer spends once acquired.
For example, if you run a subscription-based business with monthly revenue of $200 per month ($2,400 per year) and the average customer is retained for 3 years, the CLV is $7,200 (36 months x $200/month).
You can see how a CLV of $7,200 provides a nearly 10x ROI on a CAC of $750. However, if your CLV was only $500, it would indicate you spend more on acquiring clients than you ultimately gain from them.
IMPROVING CAC
If you find that your CAC is too high or simply wish to reduce CAC, there are a few measures you can take.
- Marketing Analytics: Leverage marketing data analytics tools like Google Analytics, SEO and A/B Testing to track and improve conversion rates.
- Improve Client Value: By gathering valuable feedback from your customer, sometimes referred to as VOC (voice of the customer), you can tailor your services to add more value and in turn retain customers for a longer period of time and increase CLV
- Customer Referral Programs: Referrals through existing customers are generally less costly than seeking out new customers on your own. Sometimes, a lead is referred at no cost. Lean on existing customers to help act as an extension of your marketing function.
THE BOTTOM LINE
It is difficult to improve what you do not measure. Thus, the first step in any business strategy is to determine the important metrics to achieve your goals and measure them. Regularly monitoring your CAC and CLV will help you improve the efficiency and profitability.
If you would like to learn more about other key metrics to help in your decision making or could use a partner to help build a custom KPI Dashboard for your organization, contact us for a free strategy call