The Basics of Customer Acquisition Cost (CAC)
Businesses are often founded on great ideas. But even the best plans only go so far. A key contributor to the success of any business is fiscal management.
It’s no surprise that financial management and success go hand in hand. Making smart financial decisions can make a world of difference in your profit and loss ratio.
Customer Acquisition Costs or CAC determine how fast businesses can grow. CAC also measures the health and stability of growth. Thus, it is a key metric every company must know and manage.
This is the first of several blogs that will review this key metric. Let’s start with the basics and understand what Customer Acquisition Costs are.
What is CAC?
Customer Acquisition Cost, as you guessed it, is the cost a business bears to acquire a new customer. It is the simple relationship between the amount a customer pays you and the amount you pay to get the new customer.
If the amount a customer pays your business is higher than the amount, you pay to acquire the customer, voila! Your company makes a profit. (Of course, this assumes that the cost of doing business is less than what a customer pays.) But if you are paying more than your customers do, relax… take a deep breath and read these blogs until the end. You may also like to study an infographic we posted, How to Generate Leads with Zero Marketing Budget.
CAC helps you:
- Get a clear picture of how much is spent to convert leads into customers
- Get an accurate conversion rate (to know how this will help you increase your profits, read on)
- Project the income a new customer generates minus costs to acquire the customer
- Calculate your net profits accurately
- See the actual money your business generates
Beside CAC, there are a few obvious metrics that help you determine the success of your online marketing model. Some of the most discussed factors are Conversion Rate, Bounce Rate, ROI, ROAS, etc. It’s surprising how many businesses almost ignore the role of CAC. Are you among them?
Why don’t businesses compute Customer Acquisition Costs?
CAC is a prime metric that SaaS company owners must look into to determine the health of the business. But just like humans tend to ignore their health until they fall sick, business owners tend to overlook CAC until they face a loss or a big drop in profits. The management of your product and marketing teams often seem to overshadow the significance of CAC.
David Skok mentions on his blog forENTREPRENEURS that,
‘After closely watching several hundred startups that have failed, I observed that a very large number of these had solved the product/market fit problem, but still failed because they had not found a way to acquire customers at a low enough cost.’
Most businesses do not put enough effort towards the efficiency of customer acquisition expenses because the naively believe healthy profit margins are enough. But, once they face a loss and their business is diagnosed with ‘High CAC,’ it’s a scramble to adjust. Trust us; you can avoid this desperate situation. Most businesses do not have a customer acquisition model or a customer acquisition plan. Marketers tend to neglect the inclusion of this KPI when drafting lead generation strategies.
We understand that CAC is not straightforward to calculate accurately, but ignoring it is also not the solution. So, in our next blog, we will provide a simple way to calculate your CAC as accurately as possible. We will guide you through the steps. You enter a few values and get the right calculations you need to avoid CAC disasters.