The Customer Acquisition Cost (CAC) is an all-too-often overlooked metric that deserves every company’s attention and should be a primary concern for its marketers. CAC determines if some of your sales and marketing activities aren’t effective – and most importantly – it determines where you might be wasting money. Read on to learn how to reduce your CAC to improve your profitability.
What is the CAC?
The customer acquisition cost is the total cost of a company’s sales and marketing efforts (including salaries, commissions, bonuses, lead sources and overhead) divided by the number of new customers. In other words, it’s the cost per contact/lead/customer in any given timeframe.
As you analyze your company’s spending, the CAC should be your main metric because it’ll allow you to understand where you’re spending smart, and where you might be wasting money. You’ll know the answer to the age-old marketing question: if I invest $1 in a particular channel, how much average return will I get on that dollar? This allows you to proactively manage the growth of your business. Marketing is only one part of the total CAC, but cost-effective marketing plays an important role.
Besides influencing your margin, the CAC also directly impacts the payback period (when you start to make money out of a single contact/lead/customer). The lower the CAC, the faster you can make money.
How to reduce your customer acquisition costs
Here are a few tips to lower customer acquisition costs while increasing revenue.
1. Align Sales and Marketing (SMARKETING)
Here’s a fun word: SMARKETING. By unifying sales and marketing (two teams working toward the same goal), everyone can do their jobs more effectively. The first step is to make sure sales and marketing have the same understanding of what defines a “qualified lead”. If marketing sends a high volume of unqualified leads down the sales funnel, allocating time/money in the meantime, the CAC gets higher and the sales cycle gets longer. When sales and marketing communicate about lead quality, inbound marketing can shorten the sales cycle by including more segmented, customized content to nurture targeted leads.
2. Reduce cold calling with inbound marketing
The flipside to educating the marketing team about qualified leads, is educating the sales team about inbound marketing. Sales should have a basic understanding of inbound marketing in order to achieve a higher sales close rate through warm calls (vs. the dreaded cold call). By honing website messaging, blog, subscriber emails and all other communications to satisfy the needs of your buyers, companies can effectively transition their cold leads into warm leads. Creating content that will appeal to targeted leads enough to convert (i.e., subscribe to email, access gated content) will help the sales team decipher who is ready to buy.
3. Analyze and track your efforts
Marketing automation is one of the best ways companies can track lead engagement and move them through the sales funnel through a personalized content experience. Successful companies continually produce targeted content, and marketing automation allows them to react fast, and adjust marketing efforts where needed. Monitor your most successful channels and shift your “channel focus” where needed.
Last but not least, it's also crucial that you’re monitoring which marketing channels are delivering high (and low) conversion rates, allowing you to correctly distribute resources toward the high-ROI campaigns. Once you’ve initially reviewed your company’s customer acquisition costs, it’s important not to neglect fluctuations so you’re constantly getting the most bang for your buck. For example, if you notice leads that come from your company blog are less expensive to acquire and have a higher sales close rate, you undoubtedly want to invest more resources in this channel.
By now you know that the lower the CAC, the more profitable your business. If you spend more to obtain a customer than you can make money out of them, you’ll be out of business quickly. The CAC is one metric that can help you to optimize your business model to acquire customers at a lower cost.