Customer Acquisition Cost (CAC) is the total overall cost to acquire a customer, including the cost of producing, storing, and shipping the items that a customer purchases.
The data for this metric can be discovered in both shopping platform and financial tools.
How to calculate Customer Acquisition Cost:
To calculate Customer Acquisition Cost simply find the sum of all marketing and sales expenses over a given period divided by the number of new customers added during that same period.
An example would be if your company made bicycles. If the parts of the bicycle cost $100, packaging the bicycle cost $25, and you paid someone $50 to put it together, your total Cost of Goods Sold for that bicycle is $175.
Notes
- CAC channels can and should be broken down by initiative.
Why Customer Acquisition Cost is important:
Famous technology leader David Skok once hypothesized that “failure to get product/market fit right is very likely the number one cause of startup failure. However… I believe the second biggest cause of startup failure is: the cost of acquiring customers turns out to be higher than expected, and exceeds the ability to monetize those customers.”
Customer Acquisition Cost is often the most informative eCommerce metric when it is used with other indicators to compare marketing channels, campaigns, or tactics. The value that it brings is being able to quantify your sales and marketing expenses in terms of customer count. It helps you understand the sustainability and scalability of your business. Reducing said acquisition expenses is an effective way to increase profits overall and boost the value of each transaction.
This is one of the most important measures for online businesses because having a positive Customer Acquisition Cost is the only way for a business to succeed.
How to improve Customer Acquisition Cost:
Separate your channels
Combining long-term acquisition (SEO and content marketing) with short-term acquisition (Google, Amazon, and Facebook ads) when calculating your Customer Acquisition Cost is going to give you an artificially and skewed understanding of performance.
Site analytics
Set up more in-depth goals on your analytics platform (Google Analytics, Mixpanel, etc.) to perform A/B split testing with new shopping cart checkouts in order to reduce abandonment rate and improve landing pages, site speed, and other factors to enhance overall site performance.
Optimize Google Ads
Utilize negative keywords to eliminate unnecessary clicks from customers who aren’t qualified. Make your ad-to-landing-page experience seamless and ensure all the messaging and imagery is consistent and relevant so in order to increase your Google Quality Score.
