The Ins and Outs of Customer Acquisition Cost

In days of yore, before online tools that allow companies to see exactly where their customers are coming from, advertising was a big old guessing game.

Was a new buyer drawn in by a particular promotion? No way to tell! Was an expensive ad buy really worth it, in terms of ROI? Who knows! Let’s throw more at the wall and hope that it sticks!

Tracking tools help all types of business in the modern era avoid this groping in the dark, but they’re especially effective for those that operate entirely online, like SaaS companies. When you can see which of your outreach efforts is drawing in your new customers, you can figure out precisely how much it costs to attract them.

This figure is called your customer acquisition cost, or CAC, and it is one of the most important metrics that online companies should look at in determining the health of the business and the possibility of attracting investment.

How to calculate your CAC

You can calculate your overall CAC by diving all your marketing expenses in a given time period by the number of customers who bought your product during that time. If you spent $5,000 on ad campaigns and acquired 50 new customers during a given year, your CAC for that year is $100.

Note that the status of a company will influence its CAC, which is a factor that you may want to take into account when calculating this number. Companies that have just launched or have just expended marketing into an area where people are less familiar with their industry or type of product will likely see higher CAC, though it should reduce over time with consistent marketing efforts.

Not all CAC is the same

CAC as a number out of context means little. The amount a customer spends once he or she is acquired — over the course of his or her entire relationship with your company — is crucial to judging how your CAC stacks up.

For example, a car dealership whose SUVs each sell for $20,000 may be happy with a CAC of $100, even if each customer only ever buys a single car. On the other hand, a dog food company slinging $8 bags of kibble will be out of business rapidly with a number like that if each customer only buys one bag and never returns.

If the dog food company’s customers are loyal, however, then that $100 CAC looks better and better with each repeat bag of dog food they buy. A $100 cost of acquiring a customer who buys a bag every month for a decade — racking up a total bill of $960 — seems like a decent deal.

This is why the metric of customer lifetime value (CLV) is important to track along with CAC. Tracking CLV helps you put your CAC in context and understand whether it may be a more reasonable cost than it seems at first glance.

How to improve your CAC

SaaS companies have the advantage of acquiring most of their customers through online channels, enabling them to closely track which advertising or outreach efforts are drawing buyers in most effectively and affordably. Knowing this data allows you to double down on those initiatives with lower CAC, thereby lowering your overall CAC.

Another way of improve your CAC is making conversion on your site more effective. Perform A/B split testing on various alternatives for your landing page, checkout system, site speed, mobile optimization, and any other factors that influence your visitors.

Concentrate on tightening your sales funnel and enhancing your visitors’ experience so that those who comes to your site are inclined to become paying customers. You can dream up many creative ways to make potential customers happy or engaged, such as enhanced site features, informative info products, more attractive product pages, or free trial offers.

Increasing your CLV, which will make your CAC more reasonable in context, is another way to effectively reduce your CAC. This is rarely accomplished without some form of customer relationship management (CRM). This doesn’t have to be a multi-person sales team armed with a cloud-based system. It can be a simpler contact-tracking system paired with email automation, or some variation that works for your team. To further promote loyalty, use engaging blogs, contests and giveaways, loyalty programs, or other techniques that keep customers coming back.

Acquiring customers is not easy, but strategic use of digital tools and robust data analysis can put you ahead of the game by acquiring them as cheaply as possible and holding on to them as long as you can.

Katherine Gustafson is a full-time freelance writer specializing in content for mission-driven changemakers such as tech disruptors in fintech, healthcare IT, and B2B SaaS. She also does corporate work on business topics including accounting, management, and innovation for companies such as KPMG, TD Bank, Workday, Avalara, and Adobe. She is the author of a book about innovation in sustainable food, and her writing has appeared in a wide variety of sites and publications including QuickBooks Resource Center, Business Insider, and Forbes. Follower her on Twitter @k_m_g.