Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) is the money that’s expended on convincing a buyer to make a purchase. In other words, the CAC refers to the capital and expenses expended for the creation of an existing client. It is a key business metric widely used in calculating value produced by a new customer alongside the customer lifetime value (CLV or LTV) metric. Customer acquisition costs are determined by dividing total acquisition costs for a given period by total new customers. Consumer acquisition costs would need to be smaller than their lifetime value as a consumer to be sustainable at the simplest stage.

The formula for customer acquisition cost (CAC) is as follows:

Where:

  • Sales and marketing expenses are advertisement and marketing spending, fees and incentives earned, marketer and sales manager wages, and overhead sales and marketing costs over the measurement period.
  • The number of recent customers is that the total number of acquired customers over the measurement period.

With CAC, every business will gage how much they spend on each customer purchasing it. It indicates the money to attract a customer spent on ads, wages, and other items. The best way to quantify CAC is to sum up all the costs of recruiting a client and divide it by the total number of new clients. Actually, CAC is adequate the quantity spent on sales and marketing divided by the quantity of shoppers we brought on board during the period of time that we are measuring.

Understanding customer acquisition costs (CAC) is useful in preparing future allocations of resources for marketing projects and discounts on purchases. In the course of a customer relationship, customer lifetime value reflects the monetary value that a customer is worth for the business. CAC may be a key business metric that several businesses and investors take a look at. In fact, many companies find us failing because of not fully understanding their customer acquisition cost.

Measuring Customer Acquisition Cost (CAC)

Costs historically associated with the acquisition of consumers include promotions and ads, rewards and discounts, personnel involved with certain fields of operation, and other purchases or arrangements with foreign advertising agencies. By marketing channels, most marketers would want to know their CAC. This helps them understand the foremost cost-effective thanks to acquire customers and where they must be putting more effort within the future. Incentives can be presented in different ways, such as buy-one-get-one-free offers, getting another product free with purchase, and upgrading service at no extra cost to the consumer, gift cards, or bill credits.

Understanding the expense of attracting new consumers is important for evaluating the return on investment on marketing. A company that does not understand CAC, by preferring to use Social Events as a conduit, will adversely affect profitability. As the CAC is lower than the value per client, the networks Social Media and Posters will increase profitability for the company. One business with a high occurrence of promotions directed at new customers is that the wireless and cellular industry.

Wireless providers also expand deals to new customers, such as expanded data bundles, extra free family phone lines, and discounts on the latest mobile phones. Calculated as sales and marketing expenditures divided by the number of new customers, a detailed understanding of CAC will help to increase the marketing return on investment, profitability, and profit margin for a business. CAC by itself is just a variety. It only becomes important once we are ready to compare it to customer lifetime value or the number of revenue one customer brings in over the lifetime of their relationship with our business.

 

Information Sources:

  1. investopedia.com
  2. baremetrics.com
  3. corporatefinanceinstitute.com
  4. wikipedia