February 10, 2023
Nisha Joseph
Every business knows that getting new customers costs money. You must advertise your brand to the right audience and then guide each lead to conversion. How do you keep your customer acquisition cost (CAC) down and capture valuable customers?
Read on to learn what CAC is and the best strategies to gain new customers profitably.
What Does CAC Stand For?
CAC means customer acquisition cost or the money you need to spend to gain a single customer. Various factors go into your total customer acquisition cost, including:
- Advertising
- Sales and marketing team salaries
- CRM software subscriptions
- Market research
- Content production
- Inventory, etc.
How to Calculate CAC
The CAC formula is:
CAC = Total Sales And Marketing Expenses / Total New Acquired Customers
For example, if a company spends $10,000 monthly on sales and marketing to attract 1,000 new customers, the CAC for that month is $10. Depending on your company size and industry, CAC can range from $7 to $175. But in every case, businesses can use CAC to cut unnecessary expenses and reallocate resources.
CAC vs. LTV vs. Churn Rate
CAC is one of several SaaS metrics that help you understand your return on investment (ROI). Other metrics include CLV (customer lifetime value) or LTV and churn rate.
- LTV means how much revenue each customer brings into the business.
- Churn rate means how many customers unsubscribe from your SaaS product.
The churn rate formula is as follows:
Churn Rate = (Total Lost Customers Per Month / Total Customers At The Start Of The Month)%
For example, if you begin the month with 500 subscribers to your email newsletter but end the month with 450 subscribers, your churn rate is 10% or (50/500) %. The ideal churn rate is about 5% or less.
The LTV formula is:
LTV = Average Monthly Revenue Per Customer X Customer Subscription Period (Months)
For example, if your customer spends $500 for an annual subscription, their monthly revenue is about $41.67 or (500/12).
You can also calculate LTV based on the churn rate:
LTV = Average Monthly Revenue Per Customer - Churn Per Month
For example, if your customer pays $500 per month on your subscription but loses 5% of customers that month, your churn is $25 (5% x 500). Therefore LTV is $475.
For a more detailed example scenario showing how to calculate CAC and CLV and how real strategies can impact financials for a fictitious restaurant, check out our article; 14 ways to get more customers at your restaurant.
CLV to CAC Ratio
These figures help to calculate your CLV: CAC ratio to know the ideal amount to spend to acquire a new customer. The CLV: CAC ratio formula is:
CLV:CAC = CLV / CAC
For example, if a customer brings $1,000 per month in subscriptions, and you spend $500 to win that customer, your CLV: CAC ratio is 2:1. The ideal ratio for SaaS businesses is 3:1 or higher for sustainable business growth.
Top 5 Ways to Reduce Customer Acquisition Cost
Simply put, if you lower your CAC, you make more profit. But businesses often struggle to find a balance between these values, meaning it takes longer to break even and achieve growth. Implement the following strategies to keep your CAC down.
- Know Your Target Audience
Do you know who needs your products or services? Create buyer personas, conduct audience research, and narrow your niche to use your CAC budget effectively. Otherwise, you spend valuable resources on the wrong audience or misread your customers' needs.
Knowing your audience allows you to deliver brand content through the proper channels and set achievable sales and marketing targets. While audience research takes time and money, it's essential to understand a CAC score and how to minimize it for maximum revenue.
- Retain Your Current Customers
It's easier to convert a repeat customer than to capture a new one. Lower your CAC by improving your average order value (AOV). High-value product offers will likely retain an existing customer already familiar with your company. In addition, use upselling and cross-selling tactics to offset CAC costs. Also, use chatbots and other feedback methods to reduce churn rate and re-engage with lost customers.
- Implement A Retargeting Strategy
Retargeting is a digital marketing strategy that reminds your customers about your products if they visit your site but leave without buying. This tactic helps businesses with lots of website traffic but needs more conversions.
Your paid ads, like a search engine and in-app ads and banners, appear to these visitors while they browse other sites. Use retargeting to promote your bestselling products, introduce new products, increase brand awareness, and win back your audience.
- Test and Optimize Your Digital Marketing Assets
Digital marketing assets include your landing pages, videos, blogs, and social media profiles that drive your brand. You want your marketing assets working effectively because they contribute to your total customer acquisition cost. In addition to search engine optimization (SEO) and a UX/UI redesign, A/B tests are a reliable way to reduce CAC. Run these tests for 2 to 4 weeks to gather enough data about your assets' impact on your conversion rate.
A simple tweak to your call to action or image placement can lead to remarkable ROI. Ensure all your marketing content is meaningful and adds value for your customers.
- Leverage Marketing Automation
CRM tools offer automation for marketing tasks like email campaigns, social media content scheduling, audience segmentation, follow-up reminders, and more. Software like Hubspot, Pipedrive, and Monday.com immediately reduce your CAC because you'll need less time and fewer marketing team members to execute your strategy. Combine your CRM tools with an OKR (objectives and key results) framework to optimize your team and meet your marketing goals faster.
Use the Right SaaS Metrics to Reduce Customer Acquisition Cost
These five techniques can help a business go beyond the surface-level sales numbers and significantly reduce CAC. Start by calculating CAC and LTV to see how much you spend to capture new customers in the short term and how much revenue you can generate from each customer in the long term. Using the right metrics and marketing automation tools, you'll discover numerous opportunities to save on costs, optimize your sales funnel, and consistently win new customers.
