Every year you allocate a budget to invest in the growth of your business. Some dollars are allocated to offline channels and others towards online channels. You spend on popular marketing channels like special events/trade shows, affiliate commissions, online ads, SEO, and PR. You might be at a point where you have so many channels you invest in, it’s become hard to understand how your marketing dollars are performing. Assuming you don’t have an unlimited budget, chances are you want to ensure that the money is spent well across all of your marketing channels. 

However you allocate your budget, the fact of the matter is, some of your investments are providing a higher than average return and others are underperforming relative to one another. According to estimates by BusinessWire, approximately one in every five dollars spent is wasted.

As a business owner, one of the best things you can do for your business is to understand your acquisitions costs. Calculating your customer acquisition cost (CAC) can be an eye-opening exercise and no matter what business you’re in, you deploy more effective strategies and tactics and maximize the ROI on your marketing outlays by calculating your acquisition costs. 

What Is CAC (Client/Customer Acquisition Costs)?

Customer acquisition cost (CAC) is the cost related to acquiring a new customer. In other words, CAC refers to the resources and costs incurred to acquire an additional customer. 

The most basic form of your CAC is simply the number of new buyers acquired during the measurement period over total sales and marketing expenses during the measurement period. Unlike measuring return on advertising spending, a metric that examines sales from the perspective of specific campaigns, CAC examines revenue against the cost of acquiring that revenue from your total marketing program. In other words, CAC is a metric that sheds light on how your marketing efforts stack up against one another. Therefore, strategically speaking reducing these costs should be of utmost importance. 

What Happens When You Don’t Know Your CAC? 

As one of the most important metrics to track, understanding this figure can help you gain deeper insights into the drivers of your business. Here’s what happens when you don’t understand these figures:

1. You’re growing blindly – because you don’t know what’s working and what’s not and you’re scared to make any changes in your marketing
2. You’re wasting money on marketing – because you don’t know what’s working or what’s not, you continue spending on marketing that does not provide a return or provides a lower than average return
3. You’re less profitable – because you’re wasting money on underperforming marketing, your wasted dollars eat into your margins and create an opportunity cost
4. Your growth is limited – because margins are lowered and you’re missing out on returns, you’re unable to adequately invest in other growth opportunities 

Needless, to say not understanding your CAC can have a drastic negative impact on your business and keep you in a never-ending cycle of underperformance. 

How To Use CAC To Outsmart Your Competitors 

Now that you understand the importance of knowing this figure, you can use it to answer the following questions: 

• What is my best (worst) performing sales & marketing channel?
• How much money should I allocate (reduce) per channel? 
• How much can I expect to generate from each channel? 

The insights gained from answering these questions will create your next business breakthrough. Once you understand your marketing performance, you can reallocate your budget and strategic resources to areas that are providing the most return. As you continue to make smarter marketing decisions, you will outperform your competitors by increasing your visibility in the highest-ROI channels. Not to mention, the wasted spend and incremental gains can be used to experiment with or reinvested in new, higher risk, higher return channels.

7 Methods How To Reduce Your CAC Costs

Develop a Target Audience

Outline the people that your business wants to attract the most and develop your strategy around reaching your ideal targets. By aligning your advertisements and promotions with your ideal client subset, you’ll attract higher-value customers more frequently versus attracting unqualified or less than stellar buyers.

Implement CRO Strategies

Optimizing your conversions at every point along your sales process or sales funnel will enhance the effectiveness of your marketing. Testing and tweaking various elements of how prospective buyers find and engage with your business, allow you to continually improve your performance and fine-tune your approach.  

Implement a Referral Program

Most businesses rely on referrals, but most businesses also don’t have a formalized referral program. If your buyers refer you to warm leads that are already interested in learning about your product or service, their particular CAC will be $0 if they convert. These “free” customers will lower your CAC over time.

Reward Loyalty 

Acquiring new customers is much more expensive than retaining existing customers. That’s why it makes sense to incentivize loyalty. By keeping a watchful eye on your churn rates and incentivizing repeat sales, companies can increase the lifetime value of the customer, which reduces acquisition costs. 

Create Value Added Services and Upsells 

Similar to rewarding loyalty, increasing purchase frequency or the average amount purchase, value-added products and services also increase the lifetime value of the buyer which eventually reduces the overall cost to acquire

Leverage Affiliates/Strategic Alliances

Affiliate partner programs or strategic alliances are an extremely effective way to lower your customer acquisition costs. Like referral marketing, affiliate partners use their business resources and/or influence to engage with potential clients. This tactic reduces CAC because you only pay affiliates percentage-based commissions after customers buy. A company can leverage an affiliate’s ability to boost sales without any up-front costs.

Retargeting 

Retargeting and/or following up on past offers puts your company back in front of the people who’ve previously interacted with your business. Sometimes, following up on your offer can push your prospective buyer in the right direction can encourage them to continue along your sales funnel/sales process. 

Conclusion

It’s clear that the cost you pay to acquire new business is one of the most important metrics that a business can measure. Not to mention, every company has the opportunity to marginally reduce these costs. By reporting and measuring this figure, any business owner or marketing team can not only understand how their marketing is performing but stop wasting money on marketing!