Customer Acquisition Cost

The success of a business depends on understanding how much revenue they're bringing in… And at what cost. 

This is why the Customer Acquisition Cost, or CAC, is so important. It measures how much it costs to acquire a new customer. 

Management need CAC to get an idea of how much new business costs. Over time, they can use the metric to see if acquisition is profitable. They can also use it to improve sales performance by benchmarking CAC over time. 

What is Customer Acquisition Cost?

Customer Acquisition Cost (CAC) tells us how much it costs to find a lead and turn them into a customer. It factors in all marketing and sales expenses. 

If you invest $500 in outreach and secure five customers, your CAC is $100. If you invest $300 and secure 10 customers, your CAC is $30. All other things being equal, the lower your CAC, the better.  

Why is CAC important in sales?

CAC is a measurement of performance and a guiding tool. A lower CAC means that you have discovered an effective sales strategy. You’re effectively paying less per customer.  

On the flip side, a high CAC might signal a need to change and re-evaluate your sales approach. It lets you know you’re spending too much per customer. 

Customer Acquisition Cost (CAC) vs Lifetime Value (CLV)

CAC measures acquisition costs. Customer Lifetime Value (CLV) measures revenue gained from a customer throughout the business relationship. 

When CLV is higher than CAC, you are getting a profit on each customer acquired. If CAC is consistently higher than CLV, on the other hand, you’re losing money. This may mean it’s time to re-assess strategy and find ways to pay less - or get more money from - each customer. 

Factors Influencing CAC

Here are some key variables that can drive CAC up or down: 

• Marketing Costs, e.g. digital ad costs; 
• Sales Team Expenditures, e.g. salaries, commissions, and perks;
• Software and Tools, e.g. spend on CRM or email marketing solutions;
• Operational Costs, e.g. whatever it costs to keep the sales and marketing operations running.

Ways to Reduce CAC

Here are 3 simple ways to reduce CAC without sacrificing revenue. 

Use automation to cut down on repetitive tasks, reduce manual errors, and speed up sales. For example, you can automate customer follow-ups using A.I. and automation software. 

Use sales training to enhance sales team performance and improve conversion rates. Sales enablement doesn’t have to be expensive; online content is a cheap way to train your team. 

Better collateral, like video content, e-books, etc, can also improve conversions while reducing sales team workload. It also helps speed up the sales cycle by making sure your prospects get collateral quickly. 

Pitfalls to Avoid When Evaluating CAC

First, remember that CAC isn’t everything. Sales shouldn't just chase the immediate win, but also consider the relationship's potential value. If CAC is going up but you’re getting exceptional (and valuable) customers, that’s not a problem at all. 

Second, don’t keep costs down at the expense of long-term performance. Subtle expenses, like brand-building or soft marketing initiatives, might drive up CAC with no immediate payoff. Still, their long-term effects can benefit a company beyond in-the-moment metrics. 

Last, don’t be reluctant to invest in new tools. Yes; tools that provide an advantage, e.g. video recording software for sales, cost money. But saving on them keeps costs down today at the expense of tomorrow’s revenue. It’s to be avoided.