What Is Customer Acquisition Cost? How to Calculate and Optimize It

Vũ Khôi

Author at Wotech Electronics Blog

Customer acquisition cost, or the cost of acquiring a customer, is a key metric that helps businesses measure marketing campaign effectiveness and determine how to allocate resources to attract customers efficiently. So how do you reduce this cost, and how do you optimize your customer acquisition campaigns? Follow along with SimERP in the article below.

What Is Customer Acquisition Cost?

Customer acquisition cost (abbreviated as CAC) is the amount a business must spend to acquire one customer through research, marketing, and advertising activities designed to persuade them to use its products/services.

The components of customer acquisition cost include:

• Advertising, sales, and marketing expenses.

• Necessary technology and engineering equipment costs.

• Publishing costs: for executing marketing campaigns such as TV ads, social media, newspapers, magazines, etc.

• Production costs: the expenses needed to create assets such as ad videos, films, posters, etc.

• Creative costs: related to the expenses of producing content and ideas.

• Inventory maintenance.

• Salaries of staff in the customer acquisition department.

In the developing digital era, many new businesses are emerging, creating fierce market competition. As a result, the cost of gaining a new customer keeps rising, and marketing becomes more expensive as customers increasingly lose faith in brands' advertising promises. That's why calculating customer acquisition cost plays a vital role in measuring campaign performance and ROI (return on investment).

How to Calculate Customer Acquisition Cost

Over the same reporting period, customer acquisition cost is calculated as:

CAC = Total customer acquisition cost / number of customers acquired.

Example: In February, you spent $12,000 on customer acquisition and gained 120 customers, so your customer acquisition cost is $100.

CAC is a constantly fluctuating metric and is not the only measure of marketing effectiveness, for the following reasons:

• CAC varies widely between brands depending on customer needs. For example, the time customers take before buying a new car is much longer than before buying a cup of coffee.

• Gaining new customers from long-term campaigns takes longer than short-term marketing campaigns.

Still, customer acquisition cost remains an important metric for customer analysis and for making sound resource allocation decisions.

How to Reduce Customer Acquisition Cost

Looking at the CAC formula, a business can hit its business goals either by lowering CAC or by increasing the number of customers acquired. To do that, the following CAC improvement methods can help.

Optimize Your Website

Optimizing your website makes it easier for customers to find and interact with you and improves the shopping experience. Here are a few tips to consider:

• Optimize navigation and layout to be user-friendly, easy to operate, and accessible on all mobile devices.

• Build a proper conversion funnel.

• Reach the right customers through customer personas.

• Attract potential customers with useful, compelling, engaging content.

• Run an A/B testing process.

• Build an effective CTA (call to action).

Increase the Value of Existing Customers

By improving the experience of your current customers — using surveys to identify problems, proposing soothing solutions, fixing issues, and improving product/service quality — you will increase loyalty, retain them longer, and gain more value from them. Here are some suggestions for how to do this:

• Let customers tell their own story: instead of spending heavily on ineffective brand promotion, listen to existing customers describe how they discovered your brand, which features they love, and what they'd like improved — through surveys, in-person interviews, phone calls, and more.

• Create easily shareable content: for every useful, creative article, include sharing options for multiple channels so customers can share easily. This generates more engagement and followers from new users.

• Promote products through word of mouth: beyond providing quality products/services, creating promotions, offers, and fun interactive activities with prizes is a great way to spread your brand's message. When existing customers have a great experience, they are happy to share it with many others — bringing you more new customers at a CAC of zero.

Adjust and Optimize Your Customer Acquisition Strategy

Customer needs are always changing; keeping up with those changes and with feedback about your products/services helps the business adjust and improve its strategy — for example, cutting spending on ineffective marketing activities or reallocating staff appropriately. You can also research and invest in cheaper new channels or new software that supports business operations by staying current with the news. Two optimization approaches you should note:

Reduce Dependence on Paid Advertising

Investing in owned media channels — blogs, pages, websites, infographics, etc. — and earned media channels that encourage discussion, such as word of mouth, building relationships with KOLs, or SEO optimization, are two effective ways to reduce CAC over the long term.

For less money, these two channels generate better engagement than ineffective paid ads. However, if you still want to run ads, you can run them as audience retargeting — ads shown to users on other websites right after they leave your website/landing page. Retargeting ads make the most of your advertising efforts by targeting exactly the right potential customers based on their interactions with your company's channels.

Strengthen Referral-Driven Customer Acquisition Strategies

Referrals are the solution for acquiring more potential customers at zero CAC, through product/service recommendations from existing customers to other potential ones. This is exactly the goal businesses pursue in their efforts to reduce CAC and attract high-conversion potential customers.

To achieve this, you need to build strategies for attracting customers and improving their experience by enhancing product/service quality, creating attractive promotions, offers, and fun activities, and more. Additionally, invest in tools and programs that make it easier for customers to share their experiences with others.

Optimize the Customer Acquisition Campaign

To reduce customer acquisition cost and attract customers effectively, you need a carefully planned Customer Acquisition campaign. Here are the 4 elements every such campaign needs:

Sustainability

A sustainable campaign is one that can run for the long term, with investments of people, money, and time maintained in a calculated, appropriate way. Sustainability suits investments in developing website content, building blogs, pages, etc., because these efforts make customers come looking for you — known as inbound marketing. Here are the steps for effective inbound marketing:

• Research and create useful, engaging content: find out what issues your customers care about, create content that offers solutions, or start interesting topics to talk about with them.

• Build trust with customers: by improving the customer experience with quality products/services, you create loyalty and keep them engaging with your business more effectively.

• Convert customers: once you've reached customers, find every way to capture their information (email or phone number) by exchanging something of value: promo codes, special offers, ebooks, courses, etc. — things customers find interesting and useful.

• Conduct sales: study behavior and needs, introduce products/services, and respond to feedback to turn potential customers into actual ones.

• Increase customer value: keep in touch, interact, and build relationships and trust with customers to gain more value from them.

Flexibility

In a fiercely competitive environment with constantly changing customer needs, businesses must stay flexible in planning marketing strategies to persuade and retain customers and strengthen their competitive advantage.

Customers are increasingly losing trust in advertising promises about products/services. A study by HubSpot Research found that 81% of consumers trust advice from family and friends more than they trust businesses. So your customer acquisition strategy needs to be flexible and quick to respond to market shifts to improve the customer experience as much as possible.

Accurate Targeting

Not every consumer is your target customer, and spending acquisition effort on non-target customers wastes time, money, and resources. A strategy for accurately targeting your customers using the right methods therefore helps the business achieve far better results.

Target customer identification can be based on the following factors:

• Demographics: age, gender, education level, salary, marital status, etc. Differences in age, gender, and so on mean different needs and tastes among consumers.

• Geography: analyze and select regions with customer groups whose behavior and needs match your business goals.

• Psychographics: analyzing each person's behavior, interests, personality, values, outlook on life, and more. Customer psychology analysis helps the business deliver the right message.

• Customer behavior: each customer has different views, attitudes, and reactions to a product/service/activity. Through behavior analysis, the business builds content that attracts and fits the target customer group.

Diversification

People are always drawn to what's new and creative — freedom and fresh challenges that spark curiosity and the desire to prove themselves. Customers are no different. When you diversify your conversion strategy and use different conversion methods, you have a greater chance of reaching new audiences and generating new potential customers.

There are 4 types of diversification a business can consider:

• Concentric diversification: relates to operating within your company's current industry. You can diversify your marketing strategy, adopt modern technology, upgrade current products/services, or launch new ones to attract customers.

• Horizontal diversification: offering products/services unrelated to your company's main field but sharing the same customer base. For example: bookstores that don't just sell books but also other items like toys and apparel such as hats, backpacks, etc.

• Vertical diversification and integration: the entire business network is linked within the same parent company, including: diversifying into supplementary products (the parent company sells supplies to other companies) and linked diversification (the company builds a chain of operations in any direction that lets it capture economies of scale across business areas).

• Conglomerate diversification: operating in areas completely unrelated to the parent company to reduce risk, access new capital, and become a larger force in the market.

Conclusion: Customer acquisition cost (CAC) is an important metric for measuring marketing performance, but it isn't the only one. That said, CAC is very useful for allocating resources and budgets across marketing and sales. Through the article above, SimERP hopes you will choose and apply the methods that fit your business's needs and goals in reducing CAC and running customer acquisition campaigns.

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