Posted by Shivali Anand
October 5, 2021 | 3-minute read (530 words)
Your startup is probably keeping track of various metrics specific to your industry. But the customer acquisition cost, or CAC, which describes how much money it costs to bring in a single customer, is an important number in every field.
According to Profitwell, prior to the pandemic the cost to acquire a customer increased by roughly 60% from 2014 to 2019 for both B2C and B2B businesses. Meanwhile, your budget for sales and marketing probably isn’t growing at that same pace, making it more challenging to attract new consumers.
By understanding how much you are spending to bring in a new customer, you are better positioned to maximize your investment on sales and marketing initiatives.
Start by establishing a timetable
Optimally, you will make a habit of regularly calculating your CAC so you can compare one period to the next. Decide whether you will assess CAC data monthly, quarterly, yearly, per-campaign, per-salesperson or in some other way and stick with it.
To determine your business’s CAC, add all your marketing and sales expenses and divide them by the number of new clients you get during that period.
For example, if you spent $500 on marketing and sales last month and gained 175 new customers, your CAC for that month was $2.86.
Many organizations prefer to compute CAC on an annual or quarterly basis rather than monthly because it provides a more accurate picture of sales and marketing results. That's because you may run a marketing campaign in a new industry for a month, then decide not to repeat it for the rest of the year. The CAC for that month might be very different from the previous months, which is why it's essential to make a solid choice on what interval works best for your company.
Consider channel filtering
Once you've mastered computing your CAC, you can further parse the data by determining the CAC for specific marketing channels. This number will show you where to focus your marketing efforts the most precisely (hint: it's usually the channel with the lowest CAC).
This will take longer than calculating the overall CAC, but it's much more informative. You'll proceed by tallying how much money you spent on marketing and sales in each area. For example, the channels may include the following line items:
- Social media
- Free trials
- Referral programs
- Email marketing
- Direct Sales
- Business partnerships
- Pay-per-click
It might be difficult to tell which approach brought a consumer to you. Many firms use customer relationship management software to track that data and to indicate how the client was last engaged before the sale. The CAC for each channel will then be calculated using these figures.
Keep customer retention in mind
It's often said that bringing in a new client costs five times more than keeping an existing one, regardless of industry. Don’t ignore current clients in a rush to cut customer acquisition expenses and apply lowest-cost acquisition techniques.
Make sure existing customers are pleased by ensuring that your customer service methods, loyalty program, and outreach activities align with what they're looking for. You want to make sure you revitalize current consumers while simultaneously striving to gain new ones.
