What is CAC (Customer Acquisition Cost)? Why is it Important?

by | May 11, 2020 | Marketing

Over half of all small businesses in the U.S. have a website — but having a website is only the first step in the battle to acquire customers. Once you’ve taken your business online, you need to crunch some numbers to get results. One of the most important numbers of all is your CAC, or customer acquisition cost. 

What is the meaning of CAC? Answering that question is key to knowing how to make your online business more successful. Getting lots of customers is important, but you also need to know how to keep your CAC reasonable. Acquiring customers isn’t worthwhile if they’re actually costing you money! 

Wondering how to calculate customer acquisition cost, and what it can teach you? We’ve got all the answers right here, read on for more! 

clerk in front of a calculator cost

What Is CAC? The Basics You Need to Know

When asked what will help their business most, many business owners would answer, “More customers.” However, the truth is that more customers aren’t always the answer.

That answer relies on the assumption that more customers equal more money. However, what if gaining new customers was actually causing your business to lose money? That’s exactly what happens to many brands that don’t know their customer acquisition cost or CAC. 

Attracting customers isn’t free. Between advertisements, content marketing, and other strategies, businesses sink a lot of funds into gaining new customers. Customer acquisition cost is the cost of gaining each new customer.

This simple number can actually make or break your business. Let’s take a closer look at why. 

Why CAC Matters

Many of the most important facts of business are very counterintuitive, including the reasons CAC matters so much. The sooner you learn these truths, the more successful your online business will be.

Growth Isn’t Always Good

When you know your CAC, you can shed light on the myth that “more customers are always better.” The truth is, more customers are better only if you can afford them.

Your company might be attracting many new customers, providing the illusion of success. However, is the amount those customers will spend greater than the cost it took to get them? If not, your company is actually losing money, even though it appears to be growing.

Keeping your CAC low is more important than rapid, unsustainable growth. If you don’t know your CAC, though, you won’t know if your growth is sustainable or not. 

Your Resources Are Limited

Growth at any cost isn’t good. However, you still want to grow your business, right? Knowing your CAC will help you use your limited resources wisely to achieve that sustainable growth.

If you know your CAC, you can see which of your marketing strategies are truly profitable. Your CAC will change depending on how much each strategy costs, and how many customers it brings in. It’s an important piece of the marketing puzzle that many companies overlook.

Maybe you’re using two different strategies, and they’re both bringing in the same number of customers. However, the CAC for one strategy may be higher than another. Once you calculate this number, you can figure out which strategy is actually helping your company most. 

woman working on laptop  customer acquisition cost

How to Calculate Customer Acquisition Cost 

With that in mind, how can you calculate your CAC? 

There’s one easy formula. Simply divide the overall cost of getting new customers by the number of new customers you’ve gotten, and you have your CAC.

You’ll want to calculate CAC for a certain time period, so you can see how it changes with time. As mentioned above, you can also calculate CAC for individual marketing strategies. In that case, you’ll divide the cost of that marketing strategy by the number of new customers you got from that strategy. 

Improving Your CAC

When your CAC is higher than the revenue you expect to get per customer, you need to lower your CAC. Otherwise, you’re just losing money. However, even if your CAC is lower than your expected per-customer revenue, it never hurts to improve your CAC. Here are some tips on how to do this.

Go Organic

Paid advertising certainly has its place, but there are also “organic” strategies that can save money by lowering your CAC.

For example, instead of running paid ads on social media, you can build an organic social media strategy that involves posts, rather than ads, to attract customers.

Organic methods still cost money; you’ll need to pay someone to write your social media posts, for example. However, this can cost much less than paid advertising and may have exponential returns, such as if a post goes viral.

Invest in CRO

Conversion rate optimization (CRO) means changing your website to entice more people to make a purchase (or take another desired action, like joining your mailing list).

CRO costs money too, but it can pay for itself quickly by lowering your CAC. When you boost your CRO, each visitor to your site is more likely to become a customer.

Target the Right Audience

A high CAC sometimes means you’re not reaching the right target audience. Refine your knowledge of who you need to reach, and you can lower that number.

It costs less to get customers who are already primed to like your brand since they’ll take less convincing to make a purchase. Those people are your target audience. Figure out who they are, then research to discover where they hang out online, so you can place targeted messages to reach them. 

business man reaching to shake hand customer cac

Ready to Get More Customers for Less?

Don’t get fooled by the myth that “growth is always good.” Now that we’ve answered “What is CAC?”, you can see that affordable growth is better than unsustainable growth that’s costing you money. 

While it’s easy to see the benefits of lowering CAC, figuring out how to do it can be hard. Each business needs its own specialized approach to get results. 

Not sure where to start? We can help. Our marketing method will help you lower your CAC and grow your brand. Learn how it works here!

323 Team