LRP | CUSTOMER ACQUISITION COST (CAC)

What is customer acquisition Cost (CAC)?

CA is one of the most important metrics for all businesses, specially rertailers. CAC tells us how much it cost us to capture a new customer. Capturing new customers is more expensive than selling more to existing customers (any customer which has made at least one purchase from us) so it's important to have a constant eye on our CAC costs and minimize them as much as possible, while working to sell more to existing customers and increasing Lifetime Value (LTV).

Customer Acquisition Cost (CAC) is a metric that calculates the total cost a company incurs to acquire a new customer. This cost includes all sales and marketing expenses, such as advertising, salaries of sales and marketing teams, software tools, and other related costs, divided by the number of customers acquired during a specific period. CAC is important because it helps businesses understand how much they are spending to acquire customers relative to the revenue generated from those customers. A lower CAC is generally preferred, as it means the company is acquiring customers more efficiently.

To calculate Customer Acquisition Cost (CAC), you need to divide your total sales and marketing costs by the number of customers acquired during a specific period. Here's the formula:

{CAC} = {Total Sales and Marketing Costs} / {Number of Customers Acquired}

For example, if your total sales and marketing costs for a month were $10,000 and you acquired 100 customers during that month, your CAC would be:

{CAC} = {10,000} / {100} = $100

This means it cost your business an average of $100 to acquire each new customer during that month.

Your CAC calculation is an important factor playing into your total profitability and per customer lifetime value (LTV). If your CAC is too high as a percentage of your margins and LTV your business will have a hard time succeeding long term, even if you have a lot of money from investors.

What is a good CAC target?

- A healthy goal is for the CAC to be 1/4 or 1/3 of net LTV (profit-based LTV).

Selling to new customers can cost 5 to 25 times more than selling to existing customers so it's much more profitable to sell to existing customers.

Here are a few sources that discuss the cost difference between acquiring new customers and retaining existing ones:

1. Bain & Company's research has shown that increasing customer retention rates by as little as 5% can increase profits by 25% to 95%. They also note that acquiring a new customer can be up to 25 times more expensive than retaining an existing one.

2. According to Harvard Business Review, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.

3. Forbes cites research indicating that acquiring a new customer can cost five times more than retaining an existing customer.

How to reduce CAC

Here are some strategies to help reduce CAC:

1. Targeted Marketing: Focus your marketing efforts on the most relevant and high-potential customer segments. This can reduce wasted spend on audiences that are less likely to convert.

2. Referral Programs: Encourage existing customers to refer new customers by offering incentives. This can help acquire new customers at a lower cost, as referrals often have a higher conversion rate.

3. Optimize Conversion Funnel: Identify and remove bottlenecks in your conversion funnel. Improving the user experience and streamlining the path to purchase can increase conversion rates and reduce the cost per acquisition.

4. Partnerships and Co-Marketing: Collaborate with complementary businesses to reach new audiences. This can help reduce marketing costs by sharing resources and leveraging each other's customer bases.

8. Data Analysis: Use data analytics to track and analyze the effectiveness of your marketing campaigns. This can help identify areas for improvement and optimize your marketing spend.