Customer Acquisition Cost or CAC is the total amount of money spent on sales and marketing efforts to acquire a new customer in a certain time period. The ratio of the customer acquisition cost to the customer lifetime value is used to measure the profitability of a business.
How Do I Calculate It?
For instance, if your sales and marketing costs amount to $5000 to gain 100 customers in a year, then your CAC will be 5000/100 = $50.
Sales and marketing costs may include: \- Employee salaries; \- Advertising and content expenses; \- Technology expenses.
Why Is CAC Important?
If your customer acquisition cost (CAC) is higher than the customer lifetime value (CLV), your business won't last long. This ratio shows how healthy the balance of your business model is. For instance, the CLV of 100 customers is $100, the CAC is $50. Your profit is $50. That's a ratio of 2:1. Not bad. But what if it rises to 3:1 or 4:1? The higher it goes, the bigger the profit.
Knowing your CAC is valuable for optimizing your customer acquisition channels and compressing the sales cycle.
How Do I Improve My CAC?
- Optimize constantly
Look at the CAC/CLV ratio every once in a while. Common wisdom dictates that for every dollar you invest, you want to earn at least three dollars. Pay attention to your customer acquisition channels to note which ones work best and which ones need optimizing.
- Ask for feedback
Feedback from your clients will give you an understanding of what they actually need. You can use this information to improve your service and keep customers with the company much longer.
- Engage fast
React to customer interest as quickly as possible. This shortens your sales cycle, resulting in a lower CAC. Try using live chats or chatbots in the early stages of engagement.
Summary
Customer acquisition cost or CAC is a metric that represents the total amount of money spent to acquire a new customer. The ratio of customer lifetime value to customer acquisition cost represents the health of a business model. The standard proportion to aim for is 3:1.
Your CAC can be optimized by rethinking sales and marketing expenses.