What Is Customer Acquisition Cost?

As the term suggests, customer acquisition cost (CAC) is the amount of money a business spends on converting a potential lead into a paying customer. It is a popular metric used by modern businesses to determine their overall profitability over a specific period. Moreover, it includes all the costs associated with attracting and converting new leads, including marketing spending, overhead, salaries, rewards, etc. 

In the digital age, CAC has become an essential metric used by organizations leveraging data analytics to generate actionable insights and make data-driven decisions. Simply put, this figure determines if they’re getting their money’s worth when investing in different marketing and advertising strategies. 

How to Calculate Customer Acquisition Cost?

Calculating customer acquisition cost is relatively straightforward. You have to add together your total marketing expenses (strategy development, tools procurement, campaigns, salaries, IT, etc.) and divide them by the number of new customers you’ve acquired. However, this calculation is made for a specific period. For example, you can calculate it every month, quarterly, semi-annually, or annually. 

Let’s take an example:

Suppose your organization spent $30,000 on marketing, $50,000 on marketer salaries, and $100,000 on overhead costs in six months. In return for this investment, you acquired 300 new customers. Your CAC for this period would be:

CAC ($) = Total Investment ($)/Number of New Customers

CAC = ($30,000 + $50,000 + $100,000) / 300

CAC = $600 per customer

Please note that the example above is a simple illustration of how the metric works. Depending on your company’s size, IT infrastructure, number of marketing employees, products/services, and other factors, determining the overall costs could be far more complex. 

As a result, most modern organizations use different data management and analytics solutions to centralize and streamline all their operations and workflows into a single hub to get an accurate estimate of their expenditures. 

5 Smart Ways to Reduce Your Customer Acquisition Cost

1. Target Audience Prioritization

Every marketer understands the importance of customer segmentation. This process outlines ideal target audiences for your products and services based on demographic, psychographic, and behavioral factors. However, most businesses have a wide range of target audiences depending on their value offerings. 

For instance, a perfume brand can target both male and female buyers. Similarly, retail stores selling consumer staples can attract buyers based on income, age,  cultural background, social class, personality, family life cycle, and more. 

However, every business has one or two main target audiences that generate the most sales and revenue. Therefore, prioritizing them over others is a great way to reduce CAC. With this strategy, you can eliminate the audiences with the lowest ROI and target your best customers. 

2. Marketing Automation

Automation has become a standard in most industries following the integration and large-scale adoption of AI-enhanced solutions. Businesses can leverage these solutions to automate different aspects of their operations, including marketing. 

Some are leveraging marketing automation platforms in conjunction with their CRM tools to reduce costs in different ways. For starters, automation takes care of routine and repetitive tasks, such as data entry and communications (emails, texts, notifications, etc.). Automation allows marketing teams to operate with fewer members and frees them to work on more creative tasks and projects. 

Similarly, using content marketing tools like Jasper or Rytr, they can automate and increase content generation to target more audiences in the same timeline. 

3. Retargeting Potential Customers

Retargeting potential customers is a useful tactic for organizations looking to remain visible in front of their audiences at all times. Many prospectus buyers stop their purchase journey midway by abandoning their shopping carts or trial accounts. Sometimes, all they need is an incentive or a gentle nudge to get them to the finish line. 

Retargeting is a smart strategy to get in touch with them and prompt them to reconsider the value you’re offering. For instance, you can target them using ads, send follow-up emails, or even give them a call once in a while. 

The more customers you can convert with retargeting, the more money you can save on fresh campaigns. 

4. Landing Page Optimization via A/B Testing

In the post-pandemic age, most consumers have adopted a digital-first mindset, meaning their purchase journey typically starts online. Therefore, landing pages have become one of the most important marketing tools businesses leverage to attract new audiences to their value offerings. 

However, creating the perfect page for your target audience involves trial and error. As a result, A/B testing has become an essential tactic used to increase marketing ROI and reduce customer acquisition costs. Hence, in collaboration with marketers, web development teams test different UX designs to determine which generates the most leads. 

A/B testing could also involve tweaking the page’s content, such as layout, color palette, title, etc. 

5. Shorten Your Purchase Journey

Another great way to reduce your customer acquisition journey is by shrinking the customer purchase journey. As attention spans reduce every year, many businesses are failing to convert their leads simply because it takes too long to get from A to B. As a result, prospectus buyers abandon their purchases due to frustration, loss of interest, and other factors. 

One smart way to shrink the customer journey is to leverage social media. As modern consumers spend more time on Facebook, Instagram, and Twitter, you can sell your products and services through these platforms instead of prompting them to visit your site or business. 

Moreover, you can also create an omnichannel communication strategy to reduce friction and enable anywhere-anytime availability.