What is Customer Acquisition Cost and How is it Calculated?
Customer Acquisition Cost is a Marketing ROI metric. It basically looks at how much money a company spent to acquire new customers.
Customer Acquisition Cost= Total Amount Spent on Customer Acquisition (Sales + Marketing)/Number of Customers Acquired.
For example, if a company spent $10,000 to acquire new customers and acquired 500 customers, their CAC is $20.
What is a Good CAC for eCommerce?
For retailers hoping to benchmark CAC costs, they vary widely between industries as well as business models. According to a survey done by Propeller in 2017, the average CAC for retail was $10. This number however can seem low for a luxury retailer or a niche market.
Why is it important to measure CAC?
CAC is an important measure of the health of a business and its sustainability. . In 2019, eCommerce retailers, like many other highly competitive markets had to face the reality that CAC costs had simply gone too high. Years of focusing largely on customer acquisition had pushed the cost of acquisition over Customer Lifetime Value (CLV). What this effectively meant was that retailers could no longer hope to make back the amount they spent on acquiring a customer. This forced eCommerce companies to look at customer retention as the only sustainable strategy for growth.
CAC to CLV ratio
CLV or Customer Lifetime Value is a measure of how much revenue can be expected from a customer during their “lifetime” interacting with your brand. CAC to CLV ratio is therefore an indication of the profitability of a business. What the optimal CAC to CLV ratio depends on many factors but obviously the lower the CAC, the better. Some experts believe the ration should be around 1:3.
Ways to gain a healthy CAC to CLV ration:
- Optimize digital marketing spends: Digital marketing teams need to be disciplined in identify what opportunities will not show ROI. All ad spends must be optimized and bidding needs to be managed closely to ensure CAC costs do not jump beyond acceptable limits.
- Identify all organic sources of traffic: All organic sources of traffic must be utilised. Marketing teams should look at creating new opportunities that help attract new customers. As important as the number of new customers is also what type of customer gives you the highest ARPU.
- Increase conversion %: Once a new user in your store, the focus needs to be in converting them or getting them to make a purchase. Today ⅔ of revenue comes from returning customers.
- Focus on customer retention. Returning customers are simply better for business. They buy more. They are more engaged. Retailers need to focus on activities that help them keep their customers to increase CLV. Personalized shopping experiences have been identified as one of the biggest influencers of customer satisfaction. There is enough and more data that points to this.
- Increase AOV. Retailers need to look at product recommendations and content that is proven to increase AOV. This includes bundling and outfitting based recommendations.