CAC, or customer acquisition cost, is a crucial business metric to assess the resources you need to attract new customers and continue your business growth.

In a nutshell, if you want your business to expand its customer base and still make a profit, then it is important to understand what CAC entails, its significance, and how your team can calculate it.

Before we delve deeper, here is a table of contents to help you find exactly what you are looking for.

Table of contents

• What is Customer Acquisition Cost?
• What does the CAC include?
• Why is CAC important?
• How to calculate CAC?
• 9 ways to lower your CAC

Customer acquisition cost or CAC describes how much a company has to spend to get a new customer. In other words, a company’s CAC is the total sales and marketing cost required to earn a new customer over a specific time period.

Successful businesses are aiming to constantly reduce the cost of customer acquisition — not just to recoup revenue, but because a low CAC signifies richer health of your sales, marketing, and customer service programs.

CAC costs include anything and everything you spend money on when marketing to your customers and closing that sale.

The total sales and marketing costs can include:

• Sales and advertising costs
• Creative costs
• Technical costs
• Publishing costs
• Production costs
• Inventory upkeep
• Cost of your marketing & sales team(salaries, commissions, bonuses)

Like any metric, CAC is a lever that businesses can adjust to help them meet their goals and get insights into the effectiveness of different sales and marketing strategies. CAC is also a key metric used by revenue leaders to gain deeper insight into the drivers of their business model and is particularly relevant for high-growth companies to scale.

Let’s dive in and take a look at the two key reasons why measuring CAC is important for your business.

1. Simplify decision making and improve ROI

In its simplest form, CAC tells us how much it costs us to attract new customers but if we take a closer look we see that it also provides a mechanism by which to simplify our decision-making process.

Understanding the cost to acquire new customers is crucial to analyzing marketing return on investment. For example, for the sake of simplicity, consider a company that uses two channels to acquire customers: social media and social events and finds that it acquires 20 customers each from both in a period of 2 weeks.

As the company is getting the same number of conversions from both channels, you are likely to conclude both channels are equally effective, however this may not be the case.

CAC is an effective metric here to assess which of the two channels are giving you the lowest acquisition cost.

Let us look at the data in more detail.

Data from marketing and sales shows that social events are more costly, perhaps due to catering/ sound/music and overhead costs. Due to this, social events in this case are an extremely expensive way to acquire customers.

A company presented with this data may be in a better position to decide that social media is a better channel to spend on to acquire more customers.

2. Improving profitability and profit margin

A business that understands its CAC has the ability to fully analyze the value per customer and improve its profit margins. For example, assume that the value of each customer to a business is $60.

Relating it to the example above, which channel would you choose to use? A business that does not understand CAC would adversely affect profitability by choosing to use Social Events as a channel. On the other hand, the channels Social Media would improve profitability for the company as the CAC is lower than the value per customer.

The simplest way to calculate CAC is to add up the costs associated with acquiring new customers (the amount you have spent on marketing and sales) and then divide that amount by the number of customers you acquired.

CAC = Total cost of sales and marketing/ No. of customers acquired

Acquisition cost per channel

Now if you work in marketing and sales, you know that single-channel marketing is a losing game. To truly maximize reach, you must target your customers on multiple channels and monitor the analytics to see which one is performing the best.

This is where CAC comes in, because it is a great metric to use to determine how you can earn the most customers at the lowest price.

If you know which channels have the lowest CAC, you know where to double down on your marketing budget. The more you can allocate your marketing budget to lower CAC channels, the more customers you can obtain for a fixed budget amount.

9 ways to lower your Customer Acquisition Costs

In B2B sales, a target customer profile is needed to reach and connect with the ideal decision-makers. A laser-focused buyer persona can help you save on marketing and sales costs. For example:

1. It allows for increased personalization in campaigns
2. It enables market specificity
3. It provides information to optimize product-market fit

By focusing on a smaller segment, you can get information quickly to reroute the marketing and sales efforts if necessary. Also, if the product-market fit is not ideal, then you will be in a better position to know when to tweak the product.

You probably already know that your website and landing pages are a great way to have a passive stream of leads flowing into your business. What most people do not realize, however, is how not paying attention to your website and landing page can cost you a fortune in terms of conversions lost.

A good way to know what is working and what is not is to constantly run A/B tests on your landing pages to test variants of your landing page. Be sure to let a landing page A/B test run for 2-4 weeks at least, depending on the amount of traffic it gets, so you can have statistically significant data. This data will allow you to notice Google Analytics metrics such as bounce rates and exit rates on your landing page. Sometimes, all that is needed to capture the attention of a prospect is changing a button color or call to action text, to get an incremental impact on your conversion rates, which directly impacts your CAC.

It is no surprise that now omnichannel cold outreach surpasses single-channel cold outreach. It is well known that only two percent of sales teams are using only cold email outreach to reach out to prospects.

At its core, omnichannel outreach is the art of interconnecting channels such as social media, email, and phone to actively engage your prospects and generate leads. Simply put, the wider net you cast, the more customers you will be able to reach out to.

Here are a few channels that you can implement in your sales funnel to increase your chances of reaching maximum customer conversions:

1. Email – send targeted emails to find ideal prospects interested in your product
2. LinkedIn – start conversations with prospects by sending connection requests or messages
3. Cold calling – call prospects to initiate real-time dialogues and find opportunities

As you use multiple channels for your outreach, remember to focus on two to three channels at first and set them up in parallel. It is also important to create personalized messages for each of these channels and analyze metrics to see what is resonating best with your customers. Additionally, you also need a congregation tool like FHG for your omnichannel outreach, to help you organize everything under one roof and set up automatic and personalized actions and prompt a reply from your prospects.

The Pareto Principle, or “80/20 Rule” as it is frequently called today, specifies that 80% of consequences come from 20% of the causes.

The Pareto Principle, named after economist Vilfredo Pareto, is an incredible tool for growing your business. For instance, if you can figure out which 20% of your time produces 80% of your business’ results, you can spend more time on those activities and less time on others. Likewise, by identifying the characteristics of the top 20% of your customers (who represent 80% of your sales), you can find more customers like them and dramatically grow your sales and profits.

Not all leads will reach the bottom of the funnel and that is a fact. However, it is up to a salesperson to decide which leads are worth paying attention to and which ones are entirely irrelevant for your business. A lead qualification mechanism will help you focus on the leads that are most likely to convert.

Correspondingly, if you attract no- or low-fit customers, be sure to remove them early on. Removing unqualified leads will improve your conversion rate since your marketing and sales teams can focus only on qualified leads. More time for preparation, more time to follow-up, and hence higher conversion rate and lower CAC.

Sometimes it helps to put some of your marketing and sales efforts into auto-pilot so you can free some time of your SDRs for tasks that require their attention more and that is exactly what a sales automation tool does. Sales automation grows your business and results in easy lead generation.

With the help of a powerful sales automation tool like FHG, you can speed up a process that requires manual effort. If you use marketing automation right; it can be a huge time and cost saver and help you save a fortune on CAC.

Social selling is a new approach to selling that allows salespeople to laser-target their prospecting and establish rapport through existing connections. A great way to keep your CACs in check is to ramp up your social media presence. This includes posting regularly on your company pages, joining relevant groups, and spending judiciously on paid advertising.

Organic search is by far one of the most cost-effective ways to gain new customers. No matter what your demographics are, everyone is using the internet to find answers, products, and services.

Once you are done checking for things such as page speed, title tags, on-page SEO, and clean coding on your website, you can come to the actual task of monitoring your content. Good content is one that converts  — content on your website cannot be simple fly-by-night keyword-stuffing articles or sales pitches. Rather, your content should be helpful to readers, answer a question in your industry and be backed by keyword research. In fact, researching the most popular keywords in a niche is a great way to come up with questions that no one has asked (but needs asking). Doing this alongside your regular marketing efforts will help boost your sales pipeline at a very low CAC.

Last but not least, we know that Lifetime Value is important when it comes to determining the effectiveness of your marketing efforts. The longer you can keep a customer, the more revenue they will generate for your business. The costs of obtaining a customer are usually higher than the costs of keeping an existing one. By focusing on customer retention, you can keep your CACs low.

Do a deep analysis of customer churn to see where customers may be dropping off. What can you do to prevent this? What might entice customers to stay on for the long-term?

They say growth at any cost is a recipe for disaster and rightly so. Use CAC calculations to guide you to marketing success as it is one of the best measures out there to find out how effective your current marketing and sales strategies are per channel. You can also look at it as an overall indicator of your marketing and sales success as lower CAC equals more customers and additional ROI on the marketing spend.