What is customer acquisition cost?
Customer Acquisition Cost, abbreviated as CAC, refers to the overall time-defined cost of acquiring a single new customer, i.e., the customer-centered cost a business incurs during post-launch product/service sales/marketing as calculated periodically. It can be calculated monthly, quarterly, semi-annually, yearly, etc. Obtaining product/service-specific CAC entails dividing total sales/marketing-related costs by the number of new customers acquired during a specified period.
As a consumer-centric metric, product/service-specific Customer Acquisition Cost is invaluable in ensuring a business realizes profitable products/services. This includes high-value product/service offerings that offer brand owners a high ROI (Return On Investment) and provide target end-users with a high Value-for-Money.
Context of Cost Acquisition Cost
The Cost Acquisition Cost depicts the monetary, resource, and time costs arising from product/service-specific sales/marketing efforts for new customer acquisitions. These costs include marketing and advertising campaigns, salaries and commissions paid to sales/marketing personnel, product/service distribution/deployment fees/charges, product inventory costs, and any other sales/marketing-related expenses.
In terms of revenue-centric effect, product/service-specific CAC plays a crucial role in determining time-defined product/service profitability, i.e., profit margins availed by different product/service-specific marketing/sales strategies/approaches for a given period. In this context, Customer Acquisition Cost is typically considered alongside another product/service-specific and consumer-centric metric, the Customer Lifetime Value(LTV).
Role of Customer Acquisition Cost
While CAC focuses on sales/marketing-related costs, LTV centers on the revenue-centric potential of new customer acquisition. Consequently, product/service owners use a CAC-LTV comparison to realize the following revenue-centric goals:
Evaluation of Ongoing Sales and Marketing Efforts
Achieving desirable product/service-specific consumer awareness and adoption entails using an array of sales and marketing tactics, including physical/digital signage, online product/service ads, product/service purchase incentivization(i.e., product/service discounts and offers), email marketing, telemarketing, in-store sales promotions, and so on.
By determining the CAC on ongoing sales/marketing activities, a product/service owner can evaluate the effectiveness of an overall consumer awareness/adoption strategy in attracting new customers.
Sales/Marketing ROI Optimization
The effectiveness of sales/marketing strategies at realizing new customer acquisition depends on various factors, such as type of product/service offering, target end-user, prevailing market conditions, etc. Product/service owners need to develop a versatile customer acquisition strategy that maximizes product/service-specific ROI.
For example, a common perception asserts that offering purchase/subscription incentives on an e-commerce website should manifest a lower CAC when compared to availing the same incentives at a brick-and-mortar store. This is due to the greater consumer reach of online product/service distribution/deployment channels than physical outlets.
However, real-world outcomes can vary considerably from the expected concerning specific products/services, e.g., actual sales of high-end products such as luxury cars primarily occur at brick-and-mortar dealerships instead of e-commerce websites. In this context, CAC-based progressive sales/marketing activity assessment is one of the surest ways of realizing ROI-optimized product/service awareness and adoption strategies.
