Customer Acquisition Cost (CAC) is a metric that’s essential for all brands to stay on top of. It’s important to keep track of how much you’re spending to acquire new customers and know how much you can afford to spend. In this guide, you’ll learn how to calculate CAC as well as some tips on how you can improve it.
What is Customer Acquisition Cost (CAC)?
Before we explain how to calculate CAC, here’s what you should know about this key e-commerce metric. Customer Acquisition Cost (CAC) is how much it costs you on average to acquire a new customer. This metric is important for all brands, no matter the size or industry. CAC allows you to know how effective your advertising dollars are and helps you to understand how profitable the customers you’re acquiring with your advertising are to your business.
If you’re using a single platform such as Google Ads, it’s quite simple to see, as you can just look at your Cost per Conversion KPI. However, if you advertise across multiple platforms, you’ll need to compare your acquisition costs across all channels and find an average.
How to Calculate CAC
When you use advertising platforms like Google or Meta, they calculate your CAC for you. However, there are sometimes situations where you’ll need to know how to calculate CAC yourself, such as finding the average across all advertising platforms, or you’re using traditional advertising that don’t track these metrics for you.
There are also situations where you need to account for more than just ad-spend to identify your Customer Acquisition Costs. For instance, if you’re using Facebook Ads, you might hire an outside agency to manage these ads for you – this will need to be included in your expenses.
CAC Formula
CAC = Sales and Marketing Expenses / New Customers
Here’s an example of how to calculate your CAC:
Your brand is running a YouTube Ad campaign. It costs you $1,000 for production, and you spend $5,000 on ad-spend. From this campaign, you end up acquiring 60 new customers. Solving for your acquisition cost would look like this:
CAC = 1,000 + 5,000 / 60 = 100
Including the cost of production, your CAC is $100.
How to Lower CAC
Now that you know how to calculate CAC, here’s how to lower it. Lowering customer acquisition costs can be a game-changer for brands that are heavily focused on acquiring new customers. The cost of acquiring a new customer can be a significant expense for businesses, and it can eat into their profits if not managed effectively. That’s why it’s important for brands to find ways to reduce their acquisition costs, particularly if they rely on digital advertising platforms like Google or Meta. Fortunately, there are several ways for brands to lower their customer acquisition costs using these platforms.
Adjust Bidding Strategy
Google Ads is something that a majority of online brands use in their marketing strategy. Its popularity can be attributed to the fact that they provide businesses with a range of options for running ads on their search engine and other platforms. One of the best ways to approach lowering your CAC is to optimize your bidding strategy. By fine-tuning your bidding strategy, you can improve your ad performance and reduce your acquisition costs.
Google Ads gives you several options to choose from for bidding, ranging from manual to automated bidding powered by AI. Each method comes with its own nuances, and it requires proper testing to find what works best for your brand.
Word of Mouth Marketing
Word of Mouth (WOM) marketing is an incredibly powerful way for brands to lower their average acquisition costs. WOM marketing is when customers share their positive experiences with others, thereby promoting your brand in a highly effective and organic way.
WOM at its core is highly cost-effective, as it requires little to no investment on the part of the business. Not only is it a cheap way to acquire new customers, but those customers are also more likely to convert because people tend to trust the opinions of their friends and family more than advertisements. To really gain awareness for your brand and boost your WOM marketing strategy, you can create a referral program where customers are incentivized to share your brand, and referrals are incentivized to buy.
Improve CLV
Customer Lifetime Value (CLV) is an essential metric that can give businesses a better understanding of their customers’ value over time. By analyzing CLV, you can increase the value that your customers bring to your brand, making high acquisition costs less relevant. For example, your average customer might be worth $500 to your brand over the span of two years. If you work on improving your CLV and increase it from $500 to $700, your customers are now much more valuable. Even if your CAC stays the same dollar amount, it is relatively cheaper in comparison.
By optimizing CLV, you can indirectly lower their customer acquisition costs, but you’ll need to understand your customers’ needs by interviewing and surveying them. This allows you to be more efficient with your ad-spend because you will know who to target and what messaging to use.
One metric to look at is your CLV/CAC ratio. This gives you the ratio of how much a customer is worth to how much you spend to acquire them. If your CAC is $100, but your CLV is $1,000, then your customers are worth 10x more than you spend on them.
Increase CLV and Lower CAC
Now that you know how to calculate CAC and why understanding it is an important step for every e-commerce brand. If you find that it’s too high, you can always work on either lowering acquisition costs or focus on increasing your CLV. We are a digital agency that helps e-commerce brands scale by optimizing both CAC and CLV. We offer Customer Value Optimization (CVO) services or you can request a free CLV Audit to receive some free strategies that you can use to increase CLV and lower CAC.
Customer Acquisition Cost FAQs
What expenses are included in CAC?
When calculating your CAC, you include both ad spend and other expenses associated with the creation of the ad, such as production costs or creative costs.
How can I lower my CAC?
There are a few ways to lower your acquisition costs. If you use paid search for advertising, you can adjust your bidding strategy. You can also focus on less expensive efforts than traditional advertising, such as Word-of-Mouth marketing.