What is Customer Acquisition Cost (CAC): Meaning, Formula & Example

source : martal

Marketing is one of the essential aspects of a successful business in today’s world. Any organisation should use effective marketing tools to conduct extensive marketing to attract more customers and maximise profit.

Customer acquisition cost is an important tool that can determine the effectiveness of a company's marketing expenses. It is easy to calculate, and businesses can implement the acquisition cost and take advantage of its benefits. To understand the tool further, follow the details below.

Customer Acquisition Cost (CAC) is a company's total cost of acquiring a new customer. It includes all expenses, cash or kind, which is spent on marketing and other customer-targeted costs.

In the digital era, most marketing strategies are based on internet activity and customers' online behaviour. All online activity, like number of clicks, number of customers visiting your e-commerce platform, etc., is traceable; in this regard, CAC is a valuable tool which can help you assess the cost-to-company for acquiring customers digitally as well as physically. 

Customer Acquisition means bringing in a customer (physically or virtually); thus, all costs that target potential customers are considered to determine CAC. It is beneficial to calculate CAC and plan strategies based on the results to enhance a company's performance.

CAC Formula

The basic formula for CAC calculation is simple to understand. The total expenses on sales and marketing divided by the total number of customers acquired within a given period is the CAC of a company. Thus the customer acquisition cost formula is as follows:

Customer Acquisition Cost = Marketing and Sales Expenses                                                                                                                                                                           Total number of new Customers

Marketing and Sales Expenditures

A company spends money on several factors, such as marketing and sales, to broaden its customer base. However, expenses like employee salary, cost of raw materials, etc., cannot be included in the CAC. These cost factors may unnecessarily increase or decrease the cost per customer and produce inaccurate results.

Hence, it is important to understand the examples of marketing and sales costs clearly:

• Marketing and advertising costs: Social media ads, Pay-per-click costs, Magazines, digital ads, etc.
• Marketing employee salaries.
• Sales employee salaries.
• Commission and Payments for Marketing.

CAC is critical for a business as it effectively improves an organisation's financial performance. However, keeping acquisition costs low is an important aspect for any company as it increases profitability. Lower acquisition cost allows the company to gain a sufficient number of new customers while staying within a budget. 

You can easily reduce your customer acquisition cost by following a few simple steps:

• Research Target Audience: Understanding your filtered target audience is essential. Targeted marketing means reaching a selected group audience that will cost less than targeting a broad mass.
• Target Crowded Platform: Placing ads effectively on platforms with heavy traffic will increase your audience inflow for the cost incurred, eventually lowering your CAC.
• Focus on Retaining Customers: Try to retain existing customers and get them back for more sales.
• Efficient Team: Create a small but efficient marketing team to reduce expenses on salaries.
• Organic Methods: Try generating new customers through organic methods rather than offering commissions, etc.

For both small and large organisations, the customer acquisition cost is a valuable financial tool. It helps to systematically organise steps to increase sales and the overall value of the business. Here’s how it helps organisations: 

• Strategy Formulation: Tracking and recording acquisition costs helps to understand any company's marketing performance. Based on the CAC, a brand can formulate future marketing strategies far more efficiently than by using other methods.
• Reduction in Expenses: Determining acquisition costs helps to calculate different marketing expenses and identify the most cost-effective options. That data can be used to do focused marketing and reduce irrelevant expenditures.
• Increase Sales and Profit: Reduced and monitored CAC can help increase customer flow and overall sales and profit. 
• Return on Investment: Every penny invested into a business is expected to return with profit. The benefit of CAC is that it increases a business's return on Investment or ROI. 

Customer acquisition cost is an effective tool that helps to cut the cost of marketing, which helps businesses channel cost-efficient strategies and ensure maximum customer acquisition. It is possible to reduce the cost of acquisition of a company by simple analysis and budget restraints; it is beneficial to keep the CAC of a company comparatively low.