Customer acquisition cost (CAC) is the amount of money a business spends to acquire a new customer. It includes all sales and marketing costs, such as salaries, ad spending, and events. If you are a B2B SaaS organization and you have a team assisting the customers in onboarding, the cost of onboarding shall also be included in the CAC. Most businesses forget to recognize that until the customer is live, you haven’t really acquired that customer!
Understanding CAC is crucial because it helps businesses determine the effectiveness of their sales and marketing strategies and overall profitability. Understanding CAC will enable businesses to identify cost-effective strategies when acquiring and onboarding customers. In essence, CAC is a key metric for businesses to track in order to optimize their customer acquisition process and drive growth.
The benefits of tracking CAC
- Calculating CAC will enable businesses to allocate Sales & Marketing budgets efficiently
- Tracking CAC will enable businesses to benchmark them against similar businesses
- CAC also will be utilised to understand the CAC Payback Period which would be another interesting SaaS metric to understand the profitability of the business
How to calculate your CAC
Step 1: Gather Data: Collect all relevant data related to your marketing and sales expenses for the previous quarter. This should include expenses for advertising, discounts, salaries, and any other costs associated with acquiring new customers. Also, gather salaries and expenses related to the onboarding staff for the previous quarter.
Step 2: Calculate Total Acquisition Costs: Add up all sales and marketing costs, and add 20-30% of the onboarding costs if you are not charging for onboarding services.
Step 3: Determine the Number of New Customers: Identify the customers you have acquired in the current quarter.
Step 4: Calculate CAC: Now it's time to calculate your CAC using the following formula:
CAC = Total Acquisition Costs / Number of New Customers
Step 5: Analyse and Refine: After calculating your CAC, take the time to analyze the results. Look for any areas where costs could be reduced or efficiencies introduced.
Factors affecting CAC and how to optimise it
It's important to consider different factors that can affect your customer acquisition cost (CAC). These include your target audience, marketing channels, customer lifetime value (CLV/LTV), and conversion rates.
- Your target audience plays a crucial role in determining your CAC. If you're targeting a niche market, you may need to spend more on specific and targeted marketing efforts to reach them, resulting in a higher CAC.
- The marketing channels you use can also affect your CAC. Different channels have varying costs and effectiveness. By experimenting with different channels and tracking their performance, you can optimise your marketing spend and reduce your CAC.
- Your CLV represents the value a customer brings to your business over their lifetime. If your CLV is high, you can afford to spend more on acquiring customers, resulting in a higher CAC. However, if your CLV is low, you will need to focus on reducing your CAC to maintain profitability. You can measure this by calculating your CAC Payback Period, which will tell you how many months or years until you recover the cost of CAC.
- Finally, your conversion rates are another critical factor in determining your CAC. By improving your conversion rates through effective lead nurturing and conversion optimization strategies, you can reduce your CAC and acquire customers more efficiently
Key takeaways
- CAC is the cost incurred to acquire a new customer, including marketing,sales and potentially some onboarding expenses.
- Understanding CAC is crucial for evaluating marketing effectiveness, managing budgets, and identifying cost-effective customer acquisition methods.
- To calculate CAC, gather data on expenses, calculate total acquisition costs, and use the formula CAC = Total Acquisition Costs / Number of New Customers.
- Factors affecting CAC include the target audience, marketing channels, CLV and conversion rates. Optimizing these factors can reduce CAC.
- CAC plays a vital role in business growth and profitability by guiding resource allocation and enhancing customer retention for long-term success.
