Every company aims to acquire as many consumers as possible for growth to provide a lifetime loyal consumer base to the investors and gain the company’s advantage. The expense of gaining new consumers is called the cost of customer acquisition.
Acquiring consumers is a long process that includes advertising, marketing, marketers team, sales team, technology, and most important expenses.
Getting distinct users involves convincing them to try our and then make a buying or register with your app.
Businessmen consider the cost of customer acquisition as a necessary step in estimating how much value consumers bring to their businesses.
The cost of customer acquisition is calculated by dividing the expenses incurred by the return revenue from consumers.
However, if your cost of acquiring consumers is more than your revenue, you need to implement some practical measures.
Let’s find practical ways to m1inimize the cost of customer acquisition to earn more profit and balance the company.
WHAT’S IN IT
- How to calculate the cost
- Difference between CAC and CPA
- Steps to reduce the cost of customer acquisition
- CAC and Lifetime value
- cost of customer acquisition by industry and e-commerce
- cost of customer acquisition in SAAS
- How to improve your CAC
- Retention VS acquisition
Web-based advertising and internet companies use the cost of customer acquisition metrics to track their consumers.
It is used by investors and companies to track the conversion rate of leads into paid and loyal consumers after spending money on the acquiring process.
Investors use Customer Acquisition Cost(CAC) to know about the profit of a company. For example, if a company is extracting more consumers than the cost of acquiring it, it would be profitable for investors to invest in those internet-based companies.
Marketing specialists always finds ways to reduce the cost of extracting the consumers and want to know about their investments in advertisements.
CAC identifies the right resources needed by the company to attract consumers. You need to reduce your cost of marketing to attain higher profits.
How to Calculate the Cost
You need to calculate consumer acquisition before finding out the results about your profit and implementing steps to reduce it.
The formula to calculate the cost is
CAC= expenses incurred on sales and marketing divided by the number of new consumers acquired in a specific period.
The cost of sales and marketing includes money spent on advertisements, employees of marketing as well as sales team’s salaries, chatbots, marketing automation, creative and content price, production and inventory maintenance cost, and technical and publishing cost.
Steps to Calculate CAC of your Company
- The first step is to identify the period of your evaluation of cos, which can be quarter, month, or year.
- The next step is to calculate the total expense of marketing and sales. Calculate your metrics correctly while making investments at the early stages, like the initial stages of SEO.
- The last step is to divide the number of consumers you acquired by the process of a question from the total cost.
Difference Between CAC and CPA.
CAC stands for consumer acquisition cost, and CPA stands for cost per acquisition, and both are different from each other.
CAC calculates the money spent acquiring a paid consumer while CPA calculates the expenses of acquiring a non-paid consumer.
CPA helps as a leading indicator of measuring the CAC as a whole concept. Both work differently in B2C and B2B models; also, the freemium models use it.
The formula for calculating CAC is provided to you above. The method for calculating CPA= total marketing costs divided by the one metric that matters acquisitions cost.
Steps to Reduce the Cost of Customer Acquisition
You might not feel the need to reduce your CAC, but at one stage, you have to reduce it to boost your profit.
The following are the practical steps to minimize the cost of customer acquisition.
Target Right Consumers:
You need to define your target to get the right customers according to your need for the ideal as well as the perfect consumers. It helps in putting marketing efforts in the right place. Sometimes you need to perform retargeting with the changes in the market to make a consumer loyal to you.
Improve the Conversion Rate:
Develop a plan and strategies to improve the conversion rate and keep track of how many customers perform the desired actions and make a change in your company if required to boost the revenue.
Focus on Customer Retention:
It is easy and cheaper to keep track of your old consumers and retain them than acquiring new ones. You must serve the best quality of products and services to satisfy their needs and provide excellent experience through loyalty programs. It also increases the chances of referrals.
Lower your Churn Rates:
Every time a single user quits for service and products, it increases your CAC, so you need to keep track of your churn rates and take the right measures to reduce it by making your brand more attractive.
Automated Marketing Efforts:
Automation in the marketing process gives results faster as all the activities like generating leads, or e-mail marketing is performed quickly. It helps in increasing revenue, which means more CAC.
Apply the ‘Pareto’ Principle:
According to the Pareto principle, 20% of your efforts give 80% of the result. However, you need to know which 20% of your consumers will return you 80% of revenue and then need to focus on them.
Create Engaging Content:
Content marketing does not involve any cost to generate leads. Create a substance that attracts your targeted customers based on their preferences.
Also You can Read our blog on Everything Explained About referral marketing.
Unique Sell Proposition:
USP defines what your company believes in because you need to differentiate yourself from other companies in the market to sell yourself as unique.
Optimize your Marketing Funnel:
Ensure proper mechanisms at each stage while quantifying it to generate leads, opportunities, and actual paid customers. Understand the inefficiency, if any, at any stage of the funnel.
Implement Pricing Strategy:
CAC is dependent on the recovery, thus focus on gaining the cash from payback. Use value-based pricing to earn profits as soon as possible.
Sales and Marketing Expenses:
Filter your channels to find the effective ones and spend on them to get results. This will reduce your CAC as the right channels will be optimized.
Save Time for Engaging:
The product engagement process should be quick per customer to reduce CAC. It should be less time-consuming. Otherwise, it will cost you more.
Use your brand equity to minimize your marketing and advertising expenses. Established brands gain a higher conversion rate because of their reputation and reliability.
Know your Business:
Analyze whether your industry or sector has high or low CAC and how much your sector influences the CAC. Implement the correct marketing campaign according to your business to reduce your expenses.
Optimize the Lifetime Value:
Your products and services should add value to your consumer’s life so they can provide you lifetime value ratio,o which should be higher than CAC.
Cost of Customer Acquisition by Industry and E-commerce
The cost of customer acquisition is the most critical metric in the e-commerce industry.
The industry needs to make money by an online platform and also needs to retain old consumers at any cost.
This requires a perfect parameter to calculate its costs spent on marketing and sales to make money and grow.
Customer acquisition cost by industry means it is different in every industry in terms of the value of purchase, sales cycle, lifetime value, and lifespan of consumers, purchase frequency, marketing, as well as company maturity.
CAC is a metric also helpful in google ads, Facebook marketing, and it has different channels for business models.
Cost of Customer Acquisition in SAAS
Software as a service-based company is dependent on CAC. It needs to balance consumers, sales, and marketing costs.
Excellent SAAS uses the cost of customer acquisition effectively and uses the results to improve its marketing funnel. CAC shows the direct reflection of SAAS companies.
Suppose you own a SAAS company or thinking to remember to use CAC to spend time and money back and forth for seeing faster results of return on investments.
It helps in optimizing the ratio of CAC and LTV, determining and improving the payback period, and helps in keeping track of rate and CAC.
The payback of the benchmark of CAC returns significantly in software as a service company.
How to Improve your Customer Acquisition Cost
The cost of acquiring a customer is amongst the top concerns for a business master as it directly impacts the operational funds.
By saving on CAC, you can share a more significant part of your marketing funds in other vital areas, which will finally allow you to run your business successfully.
You need to continually take measures to improve your CAC for more profitability and growth through the optimization.
You need to focus on improving the on-site conversation rate, interaction, and messaging in campaigns, targeting the customers to have good LTC: CAC ratio. Explore new channels and mediums to find new customers and profitability.
Calculate your cost per visit by channel, the average value conversion rate of consumers from a specified channel and stay to purchase price by canal regularly track improvement.
Improving and increasing the efficiency of CAC is vital because it gets paid consumers faster and quickly, develops consumer’s lifetime value, and maintains a smooth cash flow.
Retention VS Acquisition
Customer retention and customer acquisition both are equally important for a company to grow.
Customer acquisition means acquiring new customers through marketing, advertising, and implementing strategies. So, its gaining new customers to your business.
Customer retention means retaining the old customers acquired through the problematic processes by providing them quality service, satisfaction, and loyalty.
The following are the points of difference.
To summarize, the cost of customer acquisition is a measurement that differs in every industry and depends on which strategy you implement.
You need to put a benchmark for your company’s CAC by comparing it for lifetime value. The time for recovery and payback also differs.
Like start-ups take more than one year to pay back around the benchmark while companies, which is SAAS, can pay it back in six months.
Big companies performing large scale operations have considerable capital. It takes a long period to recover from them.
The payback period can also be calculated by three metrics firstly, CAC, secondly, average revenue per account(ARPA), and thirdly, gross margin per cent.
The formula for calculating is dividing the CAC by average revenue per account(ARPA), and then you need to multiply it to gross margin per cent.
Besides the steps given above to reduce CAC, there are several other tactics and strategies to implement in your business to improve its CAC.
CAC data helps companies to decide whether they should increase their sales or cut it down.