Introduction
The most important metric to look at in your business is the cost of acquiring new customers. This is Customer Acquisition Cost, or CAC. Why is it so important? Because if you can’t figure out how to get more customers for less money, then you’re going to have a tough time growing (or sustaining) your business. This guide will take you through everything you need to know about keeping tabs on your CAC and how to lower it over time.
How does CAC work?
You’ve probably heard the phrase CAC before, or customer acquisition cost. This is a simple metric that shows how much it costs to acquire new customers. But what does it mean? CAC is calculated by dividing your total customer acquisition costs by the number of customers acquired during a set period of time (say, one quarter). The result tells you how much you spend on each new customer.
CAC helps businesses evaluate their current spending habits and strategies in light of their goals. For example: if you’re looking to grow revenue as fast as possible without investing heavily in paid advertising campaigns, then CAC becomes an important benchmark for measuring success — or failure!
How To Lower Your Customer Acquisition Cost
- Target the right audience.
- Use a mix of channels.
- Be sure to target the right audience.
Calculate Your Own CAC
If you’re interested in knowing your customer acquisition cost, there are a few simple formulas to calculate it. You’ll need to know your customer lifetime value (CLV), the number of customers you have acquired in a given period of time, and the price paid for each new customer during that same period. While this may seem complicated at first glance, it’s really not:
The formula for calculating CLV is simply how much revenue each customer generates over their lifespan divided by the cost of acquiring them (including marketing costs).
The formula for calculating CACPA is simply subtracting 1 from CLV divided by CAC. This will allow you to see how much more profitable each new customer would be if they were not acquired through paid advertising or other means of non-organic growth (like word-of-mouth).
The lower you can get your customer acquisition costs, the more profitable you will be. It’s that simple.
The lower you can get your customer acquisition costs, the more profitable you will be. It’s that simple.
The truth is that CAC is a measure of how much money it takes to acquire a customer. So if it takes $1 to acquire a new customer, then your CAC is $1. The metric itself doesn’t have any other meaning beyond this; no more and no less (though some people try to find hidden meanings in this).
Conclusion
In business, one of the most important metrics for your success is CAC. CAC stands for Customer Acquisition Cost, and if you don’t know it, you should. It’s a simple number that shows you how much you’re paying to acquire each customer. If it’s too high, then your profit margin will be low — and if it gets too low then you’ll likely go out of business.
