Why Customer Acquisition Cost Is More About Strategy Than Accounting
Customer acquisition cost, or CAC, is an increasingly important metric for businesses in the digital age, allowing them to calculate the amount of money they need to spend, on average, to convince someone to buy a product or service from them. When combined with other metrics, such as customer lifetime value, it is extremely useful.
Clearly, businesses want to reduce their customer acquisition cost, while improving the amount they take from customers over the course of their lifetime. However, it is important that they do not view it purely as an accounting exercise. Instead, as a metric, CAC is actually much more about strategy.
Understanding Customer Acquisition Cost
Organisations can calculate their customer acquisition cost with the following formula:
CAC = Marketing and Sales Costs / Total Number of Customers Acquired
The costs referred to include everything from paid marketing expenditure, to investments in new technology and salaries for your staff. This formula can then be used to assess the average cost of acquiring a customer over any given period, so you could look at a month, a three month period, a six month period, a year, and so forth.
As a metric, CAC has grown in popularity in recent times, partly because it has become easier to keep track of online advertising campaigns. However, it is important to remember that many things, from quality of products to customer service skills, can contribute to reducing your CAC besides your marketing campaigns.
Ultimately, the aim should be to ensure that the average lifetime value of a customer is greater than the average cost to acquire them in the first place. When this is achieved, the company has a profitable strategy.
“If you spend $1,000 to acquire a new customer, you want to be certain that the customer will deliver at least $1,001 over the duration of the relationship,” says Gregory Capitolo, CFO of Autopilot. “If you only make $500 from a customer that cost you $1,000 to acquire, you have an unsustainable business model on your hands.”
The Importance of Strategy
When you look at the purpose behind calculating CAC, and consider the importance of balancing it with customer lifetime value, it may seem logical to see it as a pure accounting exercise and look to either reduce marketing spend, or increase the price of your products or services to increase CLV.
Yet, in reality, this is far too simplistic a viewpoint, as it ignores the various strategic elements that go into both acquiring and retaining customers. For example, if your ratio is off, it could actually be that you need to make improvements to your team’s customer service skills, in order to attract customers and hold on to existing ones.
Investment in customer service coaching and a training programme for your team may, therefore, become a priority. This could lead to a short-term increase in your CAC, but it could reduce it in the longer term, as you attract more customers thanks for improved practices. After all, as an American Express Survey from 2011 found, 59 percent of people would try a new brand for better customer experience.
Furthermore, that investment in customer service coaching could lead to superior service for existing customers, which should help the business retain them for longer, especially in highly competitive sectors. Dealing with existing customers or accounts differently could be the key to increase their lifetime value, and will impact your overall strategy significantly.
“A company may [also] have made investments on marketing in a new region, or early stage SEO, that it does not expect to see results from until a later period,” says Chase Hughes in a blog post for KISSmetrics. “While these instances are rare, it may cloud the relationship when calculating the CAC.”
Customer acquisition cost has emerged as a popular performance indicator for sales organisations and is especially useful when viewed alongside the average lifetime value of your customers. However, it is important to understand the bigger picture and not to see it as a simple exercise that only belongs with the accountancy department.
Instead, there are a number of strategic decisions that can be made to influence how much it costs to acquire customers, and how much value they provide. On occasions, these strategic choices may even require off-setting your ratio in the short-term, in order to produce greater long-term benefits.Subscribe To Our Insights