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What is Customer Acquisition Cost (CAC)?
Customer Acquisition Cost, or CAC, represents the total expenses required to convince a potential buyer to make a purchase. The higher this figure, the more costly each new customer is for the company. The formula for calculating CAC is as follows:
CAC = customer acquisition expenses / number of new customers
Customer acquisition expenses include various costs such as advertising payments, salaries for marketers, content creators, and other associated expenses. For example, suppose a company spent 53,500 rubles on contextual advertising in "Yandex.Direct," 15,000 rubles on a marketer's salary, and 3,000 rubles on a subscription to an advertising automation service. Many people came from this campaign, but only 203 of them placed an order. Let's calculate CAC:
CAC = (53500 + 15000 + 3000) / 203 = 352.2 rub.
This means that to attract one customer through contextual advertising, the company needs to spend an average of 352 rubles. From 2013 to 2019, the average CAC across various companies increased by 60-70%, and this trend continues to grow as marketing costs rise.
Why calculate CAC?
Determining customer acquisition cost is an important tool for assessing business efficiency. Here are several key reasons why tracking CAC is essential:
- Evaluating Return on Investment: CAC helps understand how justified investments in customer acquisition are. By comparing CAC with average check and customer lifetime value (LTV), one can determine whether the company is operating at a profit or loss.
- Identifying Effective and Ineffective Channels: Analyzing CAC across various marketing channels helps identify which ones bring in many customers at low costs, and which ones need optimization.
- Optimizing Marketing Strategies: A high CAC may indicate the need to revise the marketing approach. If CAC exceeds the average check and LTV, this signals a need for optimization or even discontinuation of that channel.
For example, a company managed to determine that the CAC for organic traffic is 61 rubles, while for targeted advertising on social media it is 387 rubles. With an average check of 300 rubles, promotion on social media proves unprofitable: expenses exceed revenues. In this case, the company should optimize its advertising campaigns.
How to properly account for customers in calculations?
To ensure that the CAC figure is objective, it is essential to monitor the accuracy of customer accounting. Here are a few recommendations:
- Analyzing Dynamics: Keep in mind that customers may not arrive immediately after launching an advertising campaign. For example, the return from SEO may manifest after a month.
- Collecting Data at All Stages of the Funnel: Sometimes a customer might come from an advertising campaign but place an order through another method, such as by phone. It’s important to account for all buyers who came through advertising.
- Segmenting Customers: When calculating CAC, only include those customers who came from a specific channel. For example, for contextual advertising, only consider those who arrived from ads.
How to reduce customer cost?
If CAC is high, it does not always indicate a failed strategy. Some customers may not have been accounted for in the calculations. If you are confident that all calculations are correct, consider the following steps to reduce CAC:
- Finding Cheaper Traffic Sources: SEO can be more economical compared to contextual advertising, as it only requires spending on optimization rather than on each visited page.
- Reducing Expenses on Current Channels: Optimize targeting settings, change ad formats, or experiment with creatives.
- Tracking the Customer Journey: Follow the sales funnel and identify weak points where the most potential customers are lost, so you can optimize those stages.
How to increase average check and LTV?
To enhance business efficiency, it is important not only to reduce CAC but also to increase average check and LTV. Here are a few approaches:
- Increasing Average Check: Offer complementary products, launch promotions, and provide discounts for purchases over a certain amount.
- Encouraging Repeat Sales: Motivate customers to make repeat purchases by offering bonuses or discounts for loyal customers. For example, coffee cards are a great way to retain customers.
- Improving Customer Experience: Enhance interactions with customers, respond to negative feedback, and work on increasing loyalty.