Customer Acquisition Cost- How to Calculate, Reduce & Improve It?

Customer Acquisition Cost- How to Calculate, Reduce & Improve It?

How effective are your current digital marketing strategies? A good measure of effectiveness is the customer acquisition cost (CAC) of your paid channels. Customer acquisition cost (CAC) is a metric that is increasing with the emergence of Internet companies and web-based advertising campaigns that can be tracked. Traditionally, a company had to engage in shotgun-style advertising and find ways to track consumers through the decision-making process. CAC, as you probably know, is the cost of persuading a potential customer to buy a product or service. In this article, we'll go into more detail about the CAC metric, how you can measure it, and what steps you can take to improve it.

What is Customer Acquisition Cost (CAC)?

Customer acquisition cost (CAC) is calculated by dividing all the sales and marketing costs involved to acquire a new customer within a given time-frame. CAC is an important metric for determining profitability and efficiency for growing companies.

How to Calculate CAC

CAC is calculated by dividing the total cost of acquiring customers (cost of sales and marketing) over a given time period by the total number of customers acquired in that period.

The formula for calculating CAC is-

CAC - (Total Cost of Sales and Marketing)

One advantage of such a straightforward formula is that it gives you an easy starting point from which to base your CAC reduction initiatives, but in reality, CAC involves a number of costs that are sometimes overlooked. Information, such as your marketing budget, the salaries of your sales teams, and any other messaging or outreach actions you take to acquire new users.

5 Best Ways to Reduce Customer Acquisition Costs

Your business is not like every other business, so there will be strategies you can use to reduce CAC that won't work for other businesses. This is not an exhaustive list; this is a starter list.

Let's look at some of the most effective strategies businesses can employ to reduce customer acquisition costs and increase ROI.

1.Increase Your Conversion Rate Optimization

You can spend a lot to drive in more traffic, but how many new visitors are signing up for or installing your app? Your conversion rate is the percentage of users taking the desired action. What is the conversion rate? Conversion rate is the percentage of visitors who come to your website or landing page and convert. You can improve this by identifying visitor issues such as slow load times, addressing issues at specific times of the buyer journey, and retargeting past visitors who have made their wish to improve those rates. Not taken action, at which point people make it all the way to the signup, download/install or upgrade phase of the customer completion cycle.

2.Keep an eye on customer retention

Don't just focus on getting customers. If you have a large acquisition count but a high percentage of users stop using your product or service after a certain period, your retention. What is retention? Retention refers to a customer who continues to use a business's product or service and pays for said product or service. This is a prime number which is an issue and you will face problems with high customer churn. This is what links CAC with LTV or the long-term value of the customer. Obviously, you have to spend to close new customers, but doing so only makes sense if you can extract enough value from each customer over the lifetime of your relationship. How high your customer LTV should be is something for your marketing and accounting team to decide, but don't focus on one metric (CAC) while losing focus on the others (such as LTV) because both are how much revenue. In play - and subsequent success - you stand to make or lose.

3.Automate wherever possible

Speed ​​up and streamline processes with automation. For example, write a heartfelt, inviting, and personal welcome email that is sent to anyone who signs up or visits your page, send a thank you email to anyone who shared feedback, and give promotions and discounts. Think about offering promotional codes to your brand and bring in new customers for you. It should all be automated and happen automatically behind the scenes. This will help you reduce customer support costs, improve brand recognition, and because these things are quick and easy to set up, they can save you substantial time and money.

4.Test your ad copy

One version of your ad copy may give you great results, but you can always improve those results by customizing your copy. Look at click-through rates to identify your best-performing ads and see how they differ from ads that aren't performing well. Pause your underperforming ads and write similar variations in the style and language of strong ads. Continually improving and optimizing aspects of your paid media strategy is essential for reducing CAC in the long term.

5.Test the Creative Elements

If you're using a visual platform like Facebook Ads to promote your business, check out the click-through rate, conversion rate, and post engagement for your creative. Based on these numbers, you can add some creative testing to your marketing strategy, by applying the same creative game with contrast, test illustrations versus lifestyle images.

Measuring and tracking customer acquisition costs is important for both investors and your company. Investors can use the CAC to help determine whether they think your company is profitable. Contact us or visit our webpage of BitQuest, digital marketing agency in Malaysia, for help and identifying the factors to be included in your CAC calculation.