CAC (Customer Acquisition Cost):
The Customer Acquisition Cost (CAC) metric is the cost related to finding and securing a new customer for a business. This would include any resources and time involved in acquiring customers and reaching a deal. The metric is key to understanding the efficiency of marketing and sales, and how much value each customer is generating. This metric can then guide further business and marketing decisions.
Generally the equation to calculate Customer Aquisition Cost is:
CAC= (Cost of Sales + Cost of Marketing ÷ the number of customers).
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Marketing metrics are critical to making sure that your marketing is on track. Your marketing and sales need to be performing efficiently to drive real growth for your business. Metrics like ROI and ROAS can tell you how specific elements of your marketing are performing.
However, customer-based metrics can help you to understand how your business is performing as a whole, and what marketing contributes to that performance.
Customer acquisition cost helps businesses understand what investment is required to secure a customer. With this information, you can establish whether your pricing is right, and how viable the business is for the future.
CAC is often paired with Customer Lifetime Value. This ensures that you’re achieving the maximum value from each customer, and how that relates to the initial outlay to secure a customer. Needless to say, if your customer isn’t providing an equal value to your initial outlay, that isn’t sustainable for the business.
So, how do you calculate CAC? And why is it really so important for B2B SaaS and tech companies?
How to Calculate CAC
The customer acquisition cost metric tells you how much each customer is costing you in time and resources. You can identify how much of your sales and marketing resources go into each customer. Therefore, to begin, you need to select a period of time and identify your sales and marketing spend.
Once you have this figure, you need to identify the total amount of customers acquired during this same period. This means the number of individual sales that have been secured during this time.
Divide your total spend by your total number of sales/customers. This will give you the average amount you have spent on securing each customer.
The Customer Acquisition Cost formula is as follows:
Customer Acquisition Cost = Sales and Marketing Spend / Number of New Customers
The Importance of CAC
Why do you need to know how much each customer costs? As long as you’re getting customers, you can keep growing, right? That isn’t necessarily true. Your customer acquisition needs to be sustainable. If you’re spending more than you’re generating from each customer, your business is costing you money.
Other benefits that come with identifying your CAC and implementing this metric into your planning are:
Your CAC will tell you more about your marketing Return on Investment. Is what you’re spending on marketing worth it? Are they actually generating enough new customers?
If not, then how can you improve the marketing ROI? Without this information, you cannot begin to analyze and identify how much your marketing is generating for you.
However, your CAC also allows you to delve into your marketing, and find the most cost-effective way to generate new customers. Narrow your formula down to the spend on a specific channel, and how many customers that channel generated. You can do this across your channels, providing you with the most cost-effective channel.
Improving cost-effectiveness improves your marketing and sales ROI for the business.
Increase Profit Margin
Ultimately, the less you can spend on generating customers, the better your revenue. By understanding the value of each customer, and how much they cost the business, you can begin to improve profit margins.
If your CAC is too high, then you’re losing the profit margin and spending on the various marketing and sales costs. Reduce your costs while still maintaining the incoming customers and your business can begin to scale.
Your CAC can also be a good indicator of your potential for investment, if you’re looking to grow your company over time.
Your customer acquisition cost tells investors how scalable your company is. If your customers are costing you too much to secure, ultimately an investor can only make so much revenue.
However, if your company has a reasonable CAC, and can show demand in the industry, then investors are far more likely to be interested in your future potential.
At Nituno, we work with B2B tech companies to understand their marketing, and find strategies for future growth. Your marketing analytics are critical to building a strategy that works for you. Get in touch with us today for help translating your marketing metrics into actionable insights.