As business has changed and grown with new advancements in technology, the way in which we measure business has done so as well. One of those measurements is what is known as Customer Acquisition Cost or CAC. Customer acquisition cost is the total amount of money spent on marketing and other methods of turning a prospect into a customer. As more digital-based businesses and advertising campaigns emerge, this metric continues to show its value.

Since customer acquisition cost has been said to “make or break” start-ups, we wanted to take a look at what exactly CAC is and why it should matter to you. Unlike other metrics for understanding success, custom acquisition cost is used by both investors and companies alike to estimate the viability of an app, service, or business. Before we get into the ‘whys’ and ‘hows’ of CAC, let’s talk about the ‘what.”

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What does customer acquisition cost mean to you?

As we mentioned, there are really two different scenarios where you will be using customer acquisition cost as a valuable metric. Both of these areas play off of one another, but let’s first take a look at CAC from an investor’s viewpoint.

Investors

For investors, customer acquisition cost is one of the simplest ways to measure if a business venture has what it takes to turn a profit. By simply calculating the lifetime value of the customer, investors are able to tell how much it will cost to get that client and how much that client will then make for them.

Ideally, this cost will be less than what the client will make for the company over the lifetime of their relationship. Investors use this calculation to measure the scalability of a mobile business idea and if it has the legs to make it.

Companies

But what if the cost of acquiring a customer is more than the lifetime value of that customer? This is where the second perspective comes in. Companies and, more specifically, internal operators or marketing specialists, look at customer acquisition cost to measure how their advertising money is working.

In order words, if the cost required to acquire the client can be reduce, the company’s profit margin will increase. For these professionals, finding the balance between having a lower customer acquisition cost without sacrificing the potency of the message is a thin line to walk.

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How to measure CAC

Now that we have gone over the what, let’s talk about how. CAC can be measured fairly easily by dividing the marketing expenses by the number of customers acquired over the period of time the money was spent. For example, if you spend $50 over the course of a month to acquire 50 customers, your CAC is $1.00.

However, this example doesn’t tell the whole story. In practice, there are multiple different factors that go into figuring out the viability of your product. Not only that, but there will often be different channels, locations, and other demographics that you need to measure as well. Or, it may be that you are starting a new campaign and don’t expect to make money right away.

This is why we recommend having multiple different variations of your customer acquisition cost to account for the different situations. For instance, calculating the cost by month to keep tabs on growth, but only looking at quarterly or annual numbers to make big decisions.

CAC best practices

No matter how good your advertising campaign is, it can always be better. Customer acquisition cost is one of the best ways to figure out where you are, where you want to be, and how to get there.

In order to make sure that your adverting campaign is doing the most for your business, these are some of our best practices for using CAC effectively.

Improve on-site metrics

The first way to improve your CAC is by taking a look at your site and finding areas that can be improved along the customer’s journey. For example, performing testing on your checkout system to make sure customers aren’t abandoning their carts midway through.

By completely optimizing your site, you will have the best chance of capturing any customer that comes to your site. In so doing, you won’t have to spend as much money following up, trying to get them back. Create a website redesign checklist to pinpoint areas that need improvement.  

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Implement CRM

Most companies that take their marketing seriously have some form of customer relationship management software (CRM) that they use to stay in contact and engage their clients. By implementing a CRM system, you will be able to send automated emails, write blogs, create loyalty programs, and use many other tools to be successful.

In 2017, implementing CRM is a basic marketing concept that shouldn’t be new to you. If you don’t already have some form of customer relationship management, find out why and make the case for getting one.

Enhance user value

User value is a much more conceptual idea than something like customer acquisition cost than can easily be calculated. However, enhancing value for your user (making their lives easier) is one of the best ways to increase customer retention.

Employ different user metrics to find out exactly what your customers are looking for and see if there is a new way you can position yourself so you can meet their needs. This might mean focusing on improving customer service or simply adding additional features.

Whatever it is, by providing customers with what they are looking for, you can increase retention and thus increase the lifetime value of that customer.

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Why does customer acquisition cost matter?

At this point we hope the answer to this question is obvious. Not only does measuring CAC help your company to know where to spend its marketing resources, but it will also help investors to know if your offering is valid.

The important thing to remember with customer acquisition cost and metrics like it is that they are simply measuring what has already happened. There isn’t a metric out there that can predict the future (otherwise I probably wouldn’t have a job).

However, it can help you create a road map for where you will go next. It will be up to you to make that future a reality.