Blog 55: Customer acquisition costs (CAC) and its optimisation
- Idea2Product2Business Team
- Jun 10, 2024
- 3 min read
Updated: Apr 1
Every company will have limited number of resources and finances. Hence, we need to optimise the usage of our customer acquisition channels (read blog 54 about the different channels). An important metric to measure, track and optimise is the Customer Acquisition Cost or CAC.
How to calculate CAC?
1. Finalise the time-period for which we want to calculate the CAC for. This can be one month or one quarter or one year etc.
2. For the above selected period, find the marketing and sales cost (By adding costs for marketing, sales, salaries, software, outsourcing, events, etc.)
3. For the above selected period, identify the number of new customers.
4. Find the CAC by dividing marketing and sales cost by number of new customers.
For example, if a company spent $1000 on customer acquisition (i.e., total marketing and sales cost) in Q1 of 2024 and acquired 100 customers, the CAC would be $10.
However, we learnt that it is always good to analyse CAC in realm of the bigger picture and not in isolation. As the average CAC varies significantly from industry to industry. In addition, our acquisition efforts may not bear fruits immediately. Thus, CLTV:CAC ratio is considered a more holistic measure. Customer lifetime value (CLTV) refers to the amount of money the average customer pays to the company.
The CLTV/CAC ratio evaluates how much revenue each customer generates throughout their lifetime compared to the cost to acquire that customer. A ratio of around 3:1 is considered ideal. Below 3:1 means we are spending too much on customer acquisition. A ratio above 5:1 means there is room to increase our marketing and sales spend.
What are some best practices that leading product companies adopt to optimise their CAC?
Spend time in identifying target audience. Leverage frameworks such as user personas and customer journey maps (read more about them in blog 14 and 16). Targeting the right set of audience will automatically improve our chances of conversion.
Do not put all efforts into one channel. Diversify marketing efforts by leveraging different acquisition channels (based on feasibility, resources, and finances). Experiment with different channels to evaluate their effectiveness.
Holistic measurement. Measure and track the ratio CLTV/CAC as compared to CAC in isolation.
Focus on retaining existing customers. Studies have indicated that its more cost effective in retaining existing customers compared to acquiring new customers (to replace customers we lost).
Benefit from the compounding effect of a customer centric strategy. A satisfied customer will be a company’s brand ambassador. According to a McKinsey report, a fundamental change of mind-set focusing on the customer can generate a 20 to 30 percent uplift in customer satisfaction. Loyalty programs and referral strategies are cost-effective.
Increase owned media conversion rates. Owned media include own website, blogs, etc. (read blog 54 for more). These are low-cost channels and can significantly boost customer acquisition. Some activities include having precise calls-to-action, making websites responsive, optimising website pages, leveraging A/B testing for design, copywriting, visuals, clearly stating product benefits and etc.
Upgrade product, cross-sell, upsell. Proactively work towards increasing the lifetime value of customers.
Double down on what’s working. If a particular channel or a particular product is performing well, put efforts to push them further.
Continuously engage with target customers. Engage with existing customers and potential customers to ensure the product is always on top of their mind.
Leverage analytics to identify friction points/drop-offs within the product. Understand user behaviour and friction points within the product. Take corrective actions accordingly. For example, for an ecommerce product, cart abandonment is an issue and needs effective ways to resolve it.
Attractive pricing by bundling offers. Formulate strategies for effective pricing, product bundling, offers, discounts, etc.
Source:
Jump to blog 100 to refer to the overall product management mind map.
I wish you the best for your journey. 😊