Startup Glossary: Customer Acquisition Cost (CAC)
When a corporation spends money to acquire new customers, it is known as customer acquisition cost (CAC). Client growth initiatives can be tracked to see how much money is being made back. The cost of customer acquisition is computed by multiplying the number of customers acquired by the total cost of converting prospects into customers (marketing, advertising, sales personnel, and so on). In this post, we will dive into the topic of Customer Acquisition Cost (CAC).
What is Customer Acquisition Cost (CAC)?
The cost incurred by a business to acquire a new customer is referred to as its “customer acquisition cost,” or “CAC,” in the marketing community. Organizations are increasingly relying on web analytics to make data-driven decisions. The CAC helps firms determine if the money they spend on expanding their customer base is worth it, regardless of whether they pay for potential customers to click on advertisements or invest in articles and graphic content.
It is possible to target very particular categories of clients on the internet. This is a new concept. When it comes to marketing, companies used to have to cast a wide net to reach as many potential clients as possible. It was hoped that at the very least, this would bring in some new clients. Investing in marketing with a generalised approach often yielded low results due to the lack of specificity.
CAC measurements mixed with contemporary, targeted campaigns can pinpoint certain groups of people as well as reveal how much you’re spending on each new prospect to bring them on board and convert them into paying customers.
How to Calculate Customer Acquisition Cost?
Briefly stated, CAC is the sum of your marketing and sales expenditures divided by the number of new consumers that your company has gained to calculate. An annual or fiscal quarter-based calculation is the most common.
Because $1,000 divided by 1,000 customers equals $1 per customer, the CAC for a firm that spent $1,000 on marketing in a year would be $1.
Because they spent the same amount of money and only gained half as many consumers, the company’s CAC would be twice as high, or $2, as a result.
This is a basic calculation, but when you sum up all of your expenses, you have to account for everything from the cost of various marketing methods to the salary of your employees.
This acquisition cost formula can be used to estimate the cost of acquiring a new customer: Sales and marketing expenses divided by the total number of new customers acquired are known as customer acquisition cost (CAC).
You can use this customer acquisition cost calculator when calculating the customer acquisition cost.
Customer Acquisition Cost vs Lifetime Value
When it comes to comparing your customer acquisition cost vs lifetime value, you’re looking for an inverse relationship with your CLV being the greater of the two. The more profitable your business is, the less money you have to spend to attract a single customer and the more value that customer adds to your bottom line. An effective approach is to first establish the two numbers, then utilise them as a baseline, and then try to further separate them over time. Stability difficulties can arise as that margin of error narrows.
What is the Average Customer Acquisition Cost?
Both your website’s kind and your industry determine how many new customers you acquire on average. Here, I’ll explain how the industry you’re in affects your customer acquisition costs.
Listed below are various industries and the reasons for their prominence.
- The typical acquisition cost for SaaS companies is 205 USD. This pricing range can be viewed as the median of the various industries’ average customer acquisition costs.
- Estimated client acquisition in the education market stands around $862, according to the study. The selective nature of higher education may be to blame for this.
- HockeyStack’s findings show that internet marketing firms have the lowest customer acquisition costs because of the rise of the COVID-19 epidemic. It costs about $87 in US currency.
- The average cost of acquiring a new customer in the financial services industry is among the highest. In this industry, the average cost of customer acquisition is $640.
- The average cost of acquiring a new customer in the business consulting industry is $410.
So, the average customer acquisition cost and CAC index depend on the industry.
Conclusion
As an entrepreneur, you need to know what a reasonable customer acquisition cost is, and how to optimise it for your company. Your marketing and sales funnels are the best method to cut overall costs, allowing you to grow your business at an exponential rate.
