Customer acquisition cost (CAC) is an important business metric that many companies and investors closely monitor. In fact, several businesses fail because they don’t fully understand how much they are spending to get new customers.
1. Better return on investment
Knowing how much it costs to gain new customers helps a business evaluate whether its marketing efforts are worth the money. CAC helps a company identify the most cost-effective ways to bring in customers.
For example, in the table above, social media has the lowest cost to acquire a customer, while social events cost the most. Based on this, a company may decide to invest more in social media marketing to reach more customers at a lower cost.
2. Higher profits and better margins
When a business understands its CAC, it can better assess how much profit it earns from each customer and improve its profit margins.
Let’s say each customer brings in Rs. 5,000 in value.
Now, based on the example above, which channel would you choose?
If a business chooses social events without knowing its CAC, it could end up spending more than what it earns, reducing profit. On the other hand, using social media or posters—which have a lower CAC than the customer value—would help the business earn more profit.
How to calculate customer acquisition cost?
To calculate customer acquisition cost (CAC), divide the total money spent on getting new customers (including sales and marketing expenses) by the number of customers gained during that time. There are two ways to calculate CAC: a simple method and a detailed method.
Simple method to calculate CAC:
CAC = MCC ÷ CA
MCC = Total cost of marketing campaigns for acquiring customers
CA = Total number of customers acquired
Detailed method to calculate CAC:
CAC = (MCC + W + S + PS + O) ÷ CA
Where:
MCC = Total cost of marketing campaigns
W = Wages paid to sales and marketing staff
S = Cost of software used for marketing and sales
PS = Cost of any extra services used, like consultants
O = Overhead costs (like rent, utilities, etc.)
CA = Total number of customers acquired
This method gives a more accurate picture of how much your business is spending to get each new customer.
What is a good CAC?
A good customer acquisition cost (CAC) can be different for every industry, so looking at CAC alone doesn’t always give a clear picture. The average cost can vary a lot from one industry to another.
To know if your CAC is reasonable, it's best to compare it with the customer’s lifetime value (LTV). While CAC shows how much you spend to get a new customer, LTV shows how much total income that customer brings to your business over time.
A common rule is to keep your CAC much lower than the LTV. Ideally, CAC should be about one-third or one-fourth of the LTV. In other words, aim for an LTV to CAC ratio of 3:1 or 4:1. This means you are earning three to four times more from a customer than what you spent to get them, which helps ensure your business stays profitable.
Factors impacting CAC
Several factors influence CAC, affecting profitability and scalability. Below are the key drivers:
- Marketing expenses: Higher advertising spend increases CAC
- Sales efficiency: Inefficient sales processes can raise acquisition costs
- Competition: Intense competition drives up costs per lead
- Customer retention: Poor retention rates result in frequent acquisitions, raising CAC
Addressing these factors helps businesses achieve an optimal CAC.
Average CAC by industry
CAC varies significantly across industries due to different cost structures and sales cycles. Below is an overview:
- E-commerce: Lower CAC due to digital marketing efficiency
- Healthcare: Higher CAC due to specialised marketing needs
- Education: Moderate CAC depending on student acquisition campaigns
- SaaS: High CAC driven by long sales cycles and technical resources
Understanding industry benchmarks enables businesses to assess their performance.
How to improve average customer acquisition costs?
Businesses can lower CAC and increase profitability by implementing effective strategies. Below are actionable steps:
- Enhance targeting: Focus on the most relevant customer segments
- Optimise campaigns: Use data analytics to refine marketing efforts
- Streamline sales: Invest in efficient sales tools and training
- Leverage referrals: Encourage satisfied customers to refer others
Implementing these strategies ensures sustainable growth.
Reducing customer acquisition cost (CAC) doesn’t have to be expensive. Here’s a simple guide to help you lower your spending while keeping your sales strong.
Target the Right Audience
The first step to reducing CAC is finding the right people to sell to. Instead of trying to reach everyone, focus on the audience that’s most likely to buy your product.
Marketing attribution helps you understand how customers found your business and what made them decide to buy. This way, you can focus your money on the methods that give the best results.
It’s also smart to focus on customers who are likely to stay with you longer. These customers usually give you more value over time. Look for a healthy balance between CAC and lifetime value (LTV) – this means getting long-term, loyal customers instead of one-time buyers.
Use Retargeting Wisely
Retargeting means reaching out to people who visited your website but didn’t buy anything. Try to find out why they left, and use this information to bring them back. This can help improve your chances of turning visitors into paying customers.
Increase Customer Retention
People who’ve already bought from you are more likely to buy again. Try using loyalty programmes, collecting feedback, or sharing helpful content to keep your customers coming back. This also lowers your cost of finding new customers.
Use Affiliate and Influencer Marketing
Working with influencers or affiliate partners can help reduce CAC. You only pay them when they bring in real results, so it’s a low-risk way to attract new customers.
Improve Your Content
Good content builds trust. But don’t just create content and forget about it. Keep checking and updating it so it stays relevant and useful. Make sure your content has a clear message and encourages people to take action.
Test and Improve Your Website
Try A/B testing to see which version of your website or product page works better. Small changes – like a better headline or simpler layout – can make a big difference. A smoother user experience means more people will convert, which helps lower CAC.
Key Challenges in Managing CAC for Large Enterprises
Customer Acquisition Cost (CAC) works the same for all businesses, but large companies face a few extra challenges when trying to keep it under control.
Multiple Marketing Channels
Big companies often use many marketing channels at once – like social media, TV ads, events, and more. Managing all of them together and getting useful data can be tough. If these channels don’t work well together, it can give incorrect CAC results.
Lack of Coordination Between Teams
In large organisations, marketing, sales, and customer service teams often work separately. This makes it hard to calculate the true cost of acquiring a customer. Good teamwork and clear communication are needed to get the full picture.
Different Ways of Collecting and Reporting Data
With many teams involved, it’s difficult to follow the same method for collecting and reporting data. If the data is not consistent or if the teams use different systems, it becomes hard to understand the real CAC.
High Overhead Costs
Big businesses have more expenses, such as office costs and salaries. It’s important to include a fair share of these costs while calculating CAC, even though it can be complicated.
Complicated Customer Journeys
Customers often take many steps before making a purchase. Tracking all these steps and assigning costs to each one can be hard. Still, this is important to know how well your marketing is working.
Slow Implementation of Changes
In larger companies, making changes often takes time because of internal rules and multiple levels of approval. This can delay efforts to improve CAC, especially when the market is changing fast.
Conclusion
Customer acquisition cost (CAC) is a critical metric for evaluating business efficiency and profitability. Maintaining a low CAC while driving high-quality leads is essential for sustaining growth. Businesses must monitor factors impacting CAC, including marketing expenses and sales strategies, to optimise resources. Bajaj Finance offers tailored solutions, including financial support through a business loan, to help businesses manage CAC effectively. By improving targeting, leveraging data analytics, and enhancing sales efficiency, businesses can achieve long-term success and scalability.
