What is Customer Acquisition Cost (CAC)? Customer acquisition cost theory, uses, improvement, and FAQs.

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Customer Acquisition Cost (CAC) 

Customer acquisition cost (CAC) is a metric used to reflect the cost of convincing (acquiring) a potential customer into buying the product or subscription of service. 

CAC is used by companies and investors both.

Customer acquisition cost is paired up with another metric, customer lifetime value (LTV), which is a measure of the total revenue generated from a customer over a period of time. 

Total customer acquisition cost includes: 

Advertising and marketing costs, cost of your sales team, creative costs, technical costs, publishing costs, production costs, and inventory upkeep. 

How to calculate customer acquisition cost 

The formula for CAC is: 

CAC = (total marketing expense) ÷ (number of new customers) 

Basically, you have to add up the total costs incurred over a period of time, which includes marketing, advertising, production, technical, and other costs for gaining a customer. 

Then divide this value with the number of new customers gained during the period.

What is the use of CAC metric

CAC is useful for both investors and the company. 

Investors study the CAC data to estimate the company’s capabilities and reach over the market.

  • CAC figures can help in improving the return on investment as it can suggest a more budget friendly way that can be applied for marketing purposes and reject those methods that aren’t giving positive returns.
  • Proper analysis and reduction of CAC helps in better understanding of value per customer which results in better profits margins. 
  • CAC is studied in parallel with LTV (customer lifetime value). This pairing of these two metrics gives more refined information on costs incurred per customer and the value gained from it.

How to improve the CAC 

  • Enhance user value: This is related to customer success, if you enhance the customer’s experience by adding features or solving the issues it helps in customer retention and your customer base will help in amplifying the product among the market. 
  • Improve on-site conversion metrics: For online run businesses or SaaS businesses, this method focuses on converting the users who visit the website into buyers of the actual product. 

FAQs

Q: What is a good CAC ratio?

A: Ideally, the LTV to CAC ratio should be 3:1, which means the revenue generated from a customer should be three times the cost incurred at acquiring the customer. Lesser than this means that you should cut down your CAC. More indicates that you are spending less on the marketing. 

Q: How to calculate the CAC?

A: For a given time period, add up all the costs related to marketing and advertising that are aimed at acquiring potential customers and then divide it by the number of customers that actually purchased the product.

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