Customer Acquisition Cost (CAC)

What is customer acquisition cost?

Customer acquisition cost (CAC) is a metric that came to be thanks to the emergence and growth of Internet companies and web-based digital advertising campaigns that can be tracked and are known. This metric is used to track consumers as they go from possible customers to loyal and consistent customers.

Why is Customer Acquisition Cost Important?

The CAC metric is really important for two groups, which are the companies and investors. The first party includes the commonly seen outside, early-stage investors who use it to analyze the possibility of expansion and growth of new Internet technology companies. They can determine a company’s possible profit by looking at the difference between how much money can be obtained from customers and the costs of extracting it.

For example, if we talk in terms of the oil market, if an oil supply is in an area that really needs heavy infrastructure investments, the amount applied to obtain the oil may be greater than its market value per barrel.

When investors view Internet-based companies, they do it through the same looking lens. They concern themselves with the current and actual situation, not on future promises or maybe improving the metric unless it is totally justified.

The other party that gets interested in the metric might be internal operations or marketing specialists. They utilize it to optimize how much return on their advertising investments they can get. In other words, if the costs to obtain money from customers can be further reduced in a way that doesn’t damage the announcement campaign, the company’s profit margin might improve in a way that is noticeable, and it will make a larger profit than expected.

Investors tend to be focused and interested in providing the companies with the resources it needs for its operations, partners are often more committed to the overall growth, and the companies can use the improvement of the profit margins obtained to inform the value to its customers, and that will help a company obtain a greater market position.

How to calculate customer acquisition cost?

The CAC can be calculated by doing a simple division of all the costs spent on acquiring more customers (meaning, the marketing expenses) by the number of customers that have been acquired in the period the money was used.

For example, if a company spent $100 on marketing in a year and acquired 50 customers in the same year that they did their marketing campaign, their CAC is $0,50.

How to improve Customer Acquisition Cost?

The improvement of Customer Acquisition Cost is something that’s always on the mind of digital marketers as it is something highly beneficial to the one realizing the marketing, as improving their Customer Acquisition Cost means that there will be higher profits obtained.

There are always ways to improve an advertising campaign, meaning that they can always be more effective in possible customers. The way customer loyalty is evoked can always be improved, and more value can always be obtained from existing consumers. There are several effective methods that business can use to improve its customer acquisition costs in its industry:

  • Improve on-site conversion metrics
  • Enhance user value
  • Implement customer relationship management (CRM)