Guide to Calculating, Understanding, and Improving CAC

One of the more crucial business indicators that all companies need to be aware of is customer acquisition cost (CAC).

Guide to Calculating, Understanding, and Improving CAC

One of the more crucial business KPI indicators that all startups and growing companies need to be aware of is Customer Acquisition Cost (CAC). Utilizing this crucial KPI metric correctly will ensure that a company keeps costs to a low while concentrating its limited resources on areas that have the biggest impact.

What is Customer Acquisition Cost (CAC)?

The term "customer acquisition cost" describes the cost of bringing in new customers. This metric is essential to your startup since it allows you to evaluate how effectively you used  time and executed to your overall marketing activities. Your business should focus on figuring out how to reduce CAC expense while increasing the number of new customers you attract through all of your marketing strategies.

What is CAC
CAC

Formulae to calculate Customer Acquisition Cost (CAC)?

CAC - (Cost of Sales + Cost of Marketing) / New Customers Acquired

Type of Cost Included while Calculating CAC

  • Adspends - Money that is being spent on digital marketing
  • Employee Salaries - Salaries payment to the employees under sales and marketing department who are actively working to generate the clients
  • Creative Cost - Creative cost is cost incurred to create video, blogs or other type of content
  • Technical Cost - Technical cost will include cost incurred towards usage of technologies to attract new clients
  • Publishing Cost - Cost incurred to publish our campaign to the general public

Example 1: A Software Firm

Assume a CRM software startup invests INR 30,000 in a marketing campaign. Following the campaign, the company discovers that 1,200 new customers signed up for their service.

The company expects to spend an extra INR 50,000 per year on technical and production costs for these new customers.

This software company's CAC would be:

CAC = (50,000 + 30,000) ÷ 1,200 = 80,000 ÷ 2,000 = $40

This means that the software firm spent 40 on each new customer

Why is Cost of Customer Acquisition Important?

CAC is significant for a number of reasons:

  1. It can demonstrate the effectiveness of particular business models, such as E-commerce, SaaS, D2C or a Physical store.
  2. It can judge how well marketing strategies and techniques of distribution, like those employed in print, television, content marketing, SEO, influencer marketing, or social media marketing, are working. Calculations for some initiatives, such cost per click or PPM, might be straightforward.
  3. It can assist startups in choosing how to allocate their funding to market their products.
  4. It can provide information on more cost-effective marketing techniques.

How is Customer Acquisition Costs (CAC) determined?

By adding together all of the costs involved in acquiring a new customer, the customer acquisition cost is computed. A complete information of your expenses and overall spending is necessary for this. Remember that a CAC estimate takes into account all marketing activities, including marketing expenditure and sales team salary cost as well.

Imagine you wanted to calculate your cost per new customer over a certain period of time. You would start by listing all of the costs incurred over this time period to bring in new customers. The cost of marketing staff, the price of advertising campaigns (while taking into account the conversion rate of any campaign), and the cost of any campaign's creative charges are a few examples of what this could be. It would be necessary to add up all of these costs. Keep in mind that only new customer fees are covered here; expenses relating to client retention are excluded.

The whole cost would then be divided by the total number of consumers, and you would knowhow many new clients you brought in.

How to Improve Your Customer Acquisition Cost?

There are various techniques to decrease your customer acquisition costs overtime. Some of these are fundamental to how CAC is determined. Your CAC would reduce if you cut back on marketing costs or gained more clients. Additional options include:

  • Look for more affordable advertising strategies, such as switching to more precise digital campaigns.
  • Examine prospects for marketing automation that can help you manage and enhance your sales funnel.
  • Investigate more niche marketing alternatives for your target audience, such as A/B testing, which can reveal which messages work best for which services.
  • Explore the possibilities for content marketing services that can improve your website's SEO while simultaneously building a platform that demonstrates your authority and leadership in your industry.

How does Lifetime Value Relate to Customer Acquisition Cost?

Although customer acquisition cost and customer lifetime value (CLV) may have slightly different definitions, it is crucial to comprehend how these business measures interact.

The sum of money that paying customers give your business over the duration of their relationship with you is known as the Customer Lifetime Value (CLTV) of a customer. These metrics can be adjusted to be calculated in a variety of ways, such as over an extended period of time (like a sales cycle), the average customer's purchase price, or the average customer's lifetime spending. Your CLTV is expected to rise as a result of lower churn, higher customer valuation, and more customer happiness. The calculation time should be in line with your business model, which could have varied requirements.

To increase your profit margin and your overall marketing efforts, lowering your customer acquisition costs is crucial. It is an essential tool that you can use to figure out your overall return on investment and shows you how much money you need to spend to raise your recurring income.

About Jordensky

At Jordensky, we specialize in accounting, taxes, MIS, and CFO services for Startups and growing business and are focused on delivering an experience of unparalleled quality. When you work with Jordensky, you get a team of finance experts who take the finance work off your plate – ”so you can focus on your business.”