What is Customer Acquisition Cost (CAC) and Why it’s Important to your Startup?

Contributors: Chandala Takalkar
Published: August 14, 2018

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Customers make business. Thus, it is important for businesses to have a strong game plan to get new customers on board. Finding a repeatable, methodical strategy to draw customers to your business is the goal of customer acquisition.

Today, many web-based businesses can run highly targeted marketing and keep tabs on clients as they convert from warm leads to devoted lifelong customers. Companies and investors both utilize the CAC indicator in this setting. 

The overall cost of sales and marketing efforts, as well as any property or equipment required to persuade a consumer to purchase a good or service, is known as the CAC and is a crucial business statistic.

Why is CAC an important business growth metric? 

Getting new clients for your business can be either expensive or profitable, depending on the costs involved. The growth of your business won’t be sustainable if CAC is too high compared to Lifetime Value.  The reason being it is more expensive to acquire consumers than it will be to profit from each one.

How to consider expenses while developing your client acquisition plan

Imagine you’ve been testing several versions of your advertising to see which would bring in the most money as the busiest time of the year approaches. You ran three ads, and each one brought in 10 clients. If your only concern is client acquisition optimization, you can assume that all three of your advertisements are equal and distribute your budget appropriately.

But is that truly the best perspective to take? Will treating each ad equally enable you to increase your growth? Without a doubt, the answer is no. Carrying it out that way is wholly inappropriate for your company.

Pure client acquisition metrics are common but potentially imprecise instruments for gauging and scaling the expansion of your business. If you want to expand in a scalable and lucrative manner, you must think strategically about more than just acquiring new clients.

How to Calculate CAC

The CAC can be computed by dividing all marketing expenses (costs incurred to attract additional consumers) by the total number of customers gained during that time. Let us check the correct benchmarks for customer acquisition cost by industries in 2023.

Customer acquisition cost formula=

CAC= Total cost of marketing and sales / # of customers acquired

  • Customer acquisition cost
  • Lifetime value
  • Payback periods

Costs in an expanding company should only be seen as investments. Some of them are wise investments, while others are unreal ones. How do you distinguish between the two?

Taking a look at client lifetime value (LTV), which is the amount of money you make from a customer throughout their relationship with your company.  

What is the lifetime value of a customer (LTV)?

The revenue you receive from a specific customer over an extended period is essentially lifetime value. Most companies commonly calculate LTV over 1, 3, or 5 years. If your firm is relatively new, you may model subscription renewal rates (in a subscription business model) or repurchase rates using some reasonably straightforward methods (in a more transactional business). 

LTV is a very important measure you can use to supplement your understanding of cost and advance the maturity of your business decision-making. Still, it may be quite difficult to comprehend in a young or digital organization when there isn’t a lot of historical data.

LTV CAC= LTV/ CAC

How does LTV improve your permissible CAC effectively

Marketing professionals may often unlock more funding for their projects by understanding LTV/CAC. For example, it can assist you in deciding if you should be permitted to spend more money obtaining larger clients who would probably keep around longer and pay more overall.

An “allowable CAC” denotes something similar. The maximum allowed payment for a consumer is your permitted CAC.

You can read about customer acquisition cost vs lifetime value and understand the concept in-depth. 

CAC in E-commerce

You will undoubtedly need to invest in client acquisition if your e-commerce business is just starting and understanding the right customer acquisition costs for startups

However, as you fight to keep clients, you should eventually be able to lower the average cost of acquiring a new customer for your e-commerce business. Consider what is a good customer acquisition cost and prioritize it.

In e-commerce, acquiring customers frequently entails utilizing various digital marketing techniques or platforms. The total cost of sales and marketing for e-commerce businesses would include 

  • Paid search engine marketing (SEM) 
  • Social media marketing 
  • Content marketing 
  • Email marketing 
  • Search engine optimization (SEO).

E-commerce automation solutions, especially marketing automation, which aids business owners or marketing managers in accelerating their marketing process, are used in several of these marketing strategies.

Assuming that the total cost of the marketing was ₹1,00,000 and the number of sales/purchases was ₹2,000.

The CAC would be ₹50. 

For a growing e-commerce business, it is important to that CAC be monitored monthly and quarterly. This will indicate if the business growth is consistent or is fluctuating. 

CAC in SaaS businesses

A SaaS company’s Customer Acquisition Costs (CAC) are the costs paid to persuade clients to purchase your software or service. The term “total cost” refers to sales and marketing expenses. 

For instance, a SaaS company – ‘YourHELP’ is selling its software product that acts as a technical assistant to engineers. The total spend would include the salaries of their sales and marketing teams, marketing budget, and other miscellaneous expenses. 

  • Let’s assume the total spend is ₹10,000 (for the sake of accuracy and ease of calculation)
  • And you sold the product to ₹50 engineers.

Keeping the CAC calculation formula in mind: 

CAC= Total cost of marketing and sales / # of customers acquired ₹ = 10,000/50

CAC for ‘YourHELP’ = ₹200.

It is important that SaaS founders and marketers keep an eye on this number as it is a direct indicator of business success and growth.

CAC in Fintech

Prospects in this industry need to be well-segmented to target them in the most cost-efficient and effective way possible while also excluding those who are too expensive to acquire (i.e., have a projected LTV/CAC ratio of less than 1).

The total cost in Fintech would include expenses like: 

  • The acquisition of clients through direct external sales (i.e., a physical sales meeting at the prospect’s location), 
  • Acquisition of clients through internal sales (i.e., telephonic communication with the prospect), 
  • Or a complete online sales process with a personalized strategy (i.e., self-onboarding).

In such cases, the CAC for fintech can be calculated by using the formula individually for each of the above categories of marketing expenses OR the sum of all 3 categories can be divided by the number of clients on-boarded. 

For instance, the CAC through external sales is ₹5,000 compared to CAC through internal sales, which equals ₹2,000. This indicates that internal sales are the most profitable customer acquisition method.

CAC in EdTech

Because marketing to educational institutions and individual students has special difficulties and complications, the EdTech businesses and its customer acquisition cost in India are often greater than in other industries. 

The CAC for edtech was between 20 and 25% before to the pandemic. During the pandemic, when edtech was at its height, the same CAC grew to a staggering 70-80% of the revenue.

A higher CAC compels businesses to overcharge customers for their services.

Here are some strategies you may use to lower CAC in ed tech. 

  • Improve Targeting
  • Optimise lead generation
  • Streamline the sales process
  • Increase customer retention

Distributing CAC through channels

Very small businesses frequently expand using just one strategy or channel (e.g., events). As a result, it’s quite easy to calculate your charges because everything is obvious. However, as your organization becomes more sophisticated, you will have additional channels and methods for potential consumers to connect with your firm, which requires you to begin thinking differently about CAC and customer acquisition cost prediction.

Larger and faster-growing businesses sometimes mix many sets of techniques, each with unique CAC traits, into a broad portfolio of marketing strategies. Some will be extremely inexpensive (like a fantastic blog), while others will cost a lot of money (e.g., bidding on competitor terms in Google Search). You may balance your budget across various components of your portfolio based on the demands of your company by comprehending your CAC at the channel level.

  • Need to grow quickly at all costs? Even at a high CAC, invest heavily in channels with high volume.
  • Do you want to maximize a business valuation? To increase the number of clients who will pay you the most over the longest length of time, pay attention to LTV/CAC.
  • Need to maximize your finances? Look for affordable and quick-payback consumer acquisition strategies.

Tips on How to Improve Customer Acquisition Cost

There are various strategies your company may implement to lower client acquisition expenses in its sector:

1. Boost on-site conversion rates:

To decrease the shopping cart abandonment rate and optimize the landing page, site speed, mobile optimization, and other elements to improve overall site performance, one may set up objectives on Google Analytics and carry out A/B split testing with new checkout systems.

2. Increased user value

The capacity to produce something that users will find appealing is what we mean by the highly conceptual idea of “user value.” Customers may have desired more feature additions or quality in this regard. It could involve executing a change to the current product for better placement or creating fresh revenue streams from current clients. For instance, you could discover that the retention rate and customer satisfaction ratings are positively correlated.

3. Implement customer relationship management (CRM): 

Nearly all profitable businesses with loyal customers use CRM in some capacity. This sophisticated sales staff might use automated email lists, blogs, loyalty programs, and/or other methods to measure client loyalty.

Conclusion-

Understanding your CAC is a crucial first step in creating a successful business. You may pursue business expansion more aggressively the more precise your CAC measures are.

FAQs

1. What is customer acquisition cost?

CAC is the price of convincing a potential consumer to purchase a good or service.

2. Why is the customer acquisition cost so crucial?

Getting new clients Cost helps an organization determine the client’s whole worth to the business. It also aids in determining an acquisition’s ROI.

3. How is customer acquisition cost calculated?

Divide your overall client acquisition costs over a certain period by the number of new consumers you attracted during that same time.

4. What are some common factors that contribute to customer acquisition costs?

The most accurate way to estimate the whole cost of obtaining a new client is to use customer acquisition cost. In general, it should consider factors like advertising expenses, marketing salaries, salesperson expenses, etc., divided by the number of clients attracted.

5. Is there an ideal customer acquisition cost?

Businesses most frequently compare their customer acquisition costs to customer lifetime value. Generally speaking, a CAC: LTV ratio of 1:3 is considered a decent ratio, albeit it will change widely for various firms.

6. How does customer acquisition cost vary by industry?

Due to various factors, including but not limited to: Purchase value, Purchase frequency, Customer longevity, and Company maturity, customer acquisition cost varies between sectors.

7. How does customer acquisition cost impact customer lifetime value?

The link between a customer’s lifetime value and the cost of obtaining that customer is measured by the Customer Lifetime Value to Customer Acquisition Cost (LTV: CAC) ratio. By dividing your LTV by CAC, you may determine the LTV: CAC ratio. A sign of profitability is LTV: CAC.

About the Author

Chandala
Copywriter

Chandala Takalkar is a young content marketer and creative with experience in content, copy, corporate communications, and design. A digital native, she has the ability to craft content and copy that suits the medium and connects. Prior to Team upGrowth, she worked as an English trainer. Her experience includes all forms of copy and content writing, from Social Media communication to email marketing.

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