What is Customer Acquisition Cost (CAC) And Its Importance?

 

Customer Acquisition Cost (CAC)

What is Customer Acquisition Cost (CAC) And Its Importance?

Customer Acquisition Cost (CAC) - The cost associated with acquiring a new customer

What is Customer Acquisition Cost (CAC)?

Customer acquisition cost (CAC) is the cost associated with acquiring a new customer. In other words, CAC refers to the resources and costs used to acquire an additional customer. Customer acquisition cost is a key business metric that is commonly used in conjunction with customer lifetime value (LTV) to measure the value derived from a new customer. (READY; What is Pay Per Click (PPC) And How Its Work?)

InSummary

•       Customer acquisition cost is an important business metric used to evaluate the cost of acquiring a new customer.
•       Calculated as sales and marketing expenses divided by the number of new customers, a detailed understanding of CAC can help improve a company's marketing return on investment, profitability and profit margin.

Customer Acquisition Cost System

The customer acquisition cost formula is as follows:

Customer Acquisition Cost = Sales and marketing expenses DIVIDE BY Number of new customers

Where:

•       Sales and marketing expenses are advertising and marketing expenses, commissions and bonuses paid, salaries of salespeople and sales managers, and additional costs related to sales and marketing during the measurement period.
•       The number of new customers is the total number of customers acquired during the measurement period.
  

 

Importance of Customer Acquisition Cost

CAC is an important business metric that many traders and investors look at. In fact, many companies end up failing because they don't fully understand the cost of acquiring their customers.
 

1. Improve return on investment

Understanding the cost of acquiring new customers is important in analyzing marketing's return on investment. For example, consider a company that uses several methods to acquire customers:

Sample Center Statistics

By using CAC, a company can determine the most cost-effective way to acquire customers. In the table above, we can see that Social Media offers the lowest acquisition cost while Social Events cost the most. A company presented with this data can consider using more marketing on social networks to generate more customers. (READY; Best10 Universities To Study Digital Marketing Course)

2. Improve profit and profit margin

Understanding its CAC gives businesses the ability to fully analyze the value of each customer and improve their profit margins. For example, assume that the value of each customer to the business is $60.

Related to the example above, which channel would you choose to use? A business that does not understand CAC can negatively impact profitability by choosing to use Social Events as a channel. Social Media Channels and Banners can improve profitability for a company as the CAC is lower than the value of each customer.

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