Customer acquisition cost (CAC) is the metric companies use to calculate the money required to acquire a new customer. The metric is calculated by adding your marketing and sales costs, then dividing by the number of new customers acquired within that period. CAC answers the question of how much it costs for your organization to acquire a new customer. In this post, we’ll share why CAC is important, how to calculate CAC, and then how to optimize the metric.
Why is CAC Important
Whether you are a manufacturer or a nonprofit focused on audience development, the customer acquisition cost is an essential part of any organization and provides insights into what’s working and what is not from a customer acquisition perspective. Customer acquisition costs are a concern in any industry, but analyzing them is even more crucial to manufacturing organizations because the model depends on the lifetime value of the customer.
To acquire new customers, most manufacturers devote a substantial amount of time and money before they see a full return on their investment. Examining just how many months of revenue from a customer are needed to recover these costs becomes important to the organization meeting its market objectives. The key insight is that it may take much longer than you think for your organization to recover CAC and move towards deeper profitability. These insights can alter your organization’s strategy and provide impetus to make course corrections to marketing strategy and tactics, thus optimizing your efforts.
Customer Acquisition Costs (CAC) = Marketing and Sales Costs/New Customers Won
Marketing and Sales Costs – So what’s considered marketing and sales costs? Marketing promotion and materials, social media, CRM costs, salaries of those involved in selling are all costs. Digital advertising, LinkedIn sponsored posts, trade show fees, sales dinners, and meetings should all be included in these costs. While it may take time to identify the amount of money spent on these activities, it will be well worth the trouble. Make friends with someone in accounting or your department’s administrator to save some time to compile these costs.
New Customers Won – This is the total of all new customers won in a defined period, usually for thirty days. However, your sales cycle could be 60 or 90 days or even shorter depending on what makes the most sense for your organization and industry.
CAC Per Marketing Channel
This is the holy grail of CAC and is valued by many marketers. The process is the same: calculate the CAC but do it by channel. For example, you may have a digital lead generation strategy and would like to understand how much it takes to acquire one customer. In this instance, calculate all costs related to the channel and divide by customers won.
CAC by channel becomes even more powerful when compared to other channels. For some companies, it may require less investment to acquire a new client using account-based marketing (ABM) than by selling directly through manufactured representatives. These insights can lead to the optimization of the marketing mix, thus reallocating costs to those channels with the highest chance of success.