Customer Acquisition Cost: What Is It and How to Reduce It!

Tuesday 21st September, 2021

Acquiring new customers and retaining them is a great achievement for any entrepreneur. Bringing in more customers generates added benefits, including an increase in revenue, improved profits, and business growth. 

However, getting new customers means spending money to convert them into loyal customers. The term for this is customer acquisition cost (CAC) and it helps the business owner to be sure if spending on new customers is a worthwhile investment. 

What Is Customer Acquisition Cost?

Your customer acquisition cost is the amount of money your company spends to get a new customer. This includes the sales and marketing costs such as advertising and salaries paid to marketers to draw in a potential customer. 

It’s important to keep the CAC at a lower level that doesn’t eat into business profits. If the CAC is higher than the revenue, it will cut short the continuity of the business. 

How to Calculate Customer Acquisition Cost

Customer acquisition cost is simply calculated by taking the total costs (marketing costs) incurred to obtain customers during that period and dividing it by the number of new customers acquired during the same time. Using a practical example, let’s say the marketing cost for a company in a year was R 14,500, and it acquired 200 customers in that same year. The CAC is R 72.5.

It’s important to ensure all costs associated with acquiring customers are included in the calculation to obtain a reasonable figure. However, the CAC can be further optimized to be reliable by combining it with the Customer Lifetime Value (CLTV). The CAC and CLTV together will help give a realistic picture of how a company’s marketing campaign is performing. 

What Is Customer Lifetime Value?

Customer lifetime value is the total revenue or profit expected from a customer’s relationship with the business over time. For example, a customer who pays a monthly subscription for internet service has a higher lifetime value than a customer who buys a car from a dealership every 5 years. 

What Happens When the CAC Is Higher Than the Customer Lifetime Value?

When comparing the CAC to the customer lifetime value, it helps the company to know if it’s a good idea to spend money on acquiring new customers. A good rule of thumb is that the customer acquisition cost should never exceed the customer lifetime value.

A CLTV: CAC ratio of 3:1 is good. A business should spend approximately 30%-40% of the total value a customer brings during the lifespan of their relationship with the business.

If the CAC is higher than the CLTV, it means the firm is losing money on acquiring new customers, making its marketing efforts a poor investment. In simpler terms, this means the firm is making less than its spending.  Whereas, if the CLTV is much higher than the CAC, the company is stalling its growth by not spending on acquiring new customers. To keep the business running, it’s ideal to lower the CAC. 

Here are 3 practical ways to reduce the CAC. 

1. Test the Landing Pages

The key is making sure customers that visit a company’s website are converted into purchasing its offerings. Through testing, it becomes possible to increase conversion rates. This can be done by using A/B Testing, which determines the best marketing method before allocating a budget. It should be conducted every few weeks to ensure the landing pages are effective in optimizing conversion. 

2. Strengthen Customer Retention

It’s important to maintain the same energy spent on acquiring new customers, on retaining them. Companies can optimize strategies such as loyalty programs and customer feedback. Having a well-set onboarding process improves retention, revenue, and referrals over time.

Existing customers can also be an asset in terms of attracting new customers. This can significantly lower the cost of acquiring new customers. This requires the company to improve its cross-selling and upselling strategies. Another way is to offer incentives such as referral programs to encourage older customers to bring in new customers.

3. Optimize on Marketing Automation

Taking advantage of marketing automation software will reduce the money spent to pay employees to perform menial tasks. A business can save more in CACs by automating tasks such as reminder emails, survey emails, customer feedback emails, and product updates. 

Wrapping Up

A business will always need customers to scale its operations. Adopting strategies to reduce the costs of acquiring customers will prevent the business from running to a halt. Moving forward, smart entrepreneurs should always work on generating value for their customers throughout the lifetime of the business.

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