According to Simplicity DX research, customer acquisition is becoming increasingly expensive, experiencing a staggering 222% increase. Such a pronounced hike demands companies innovate and adjust their strategies to ensure continued profitability and growth.
This article explores the ins and outs of customer acquisition, including industry benchmarks and practical tactics to improve it.
What is Customer Acquisition Cost?
Customer Acquisition Cost (CAC) is the average amount of money a business spends to acquire a new customer.
How to calculate Customer Acquisition Cost
To calculate Customer Acquisition Cost, follow these steps:
- Determine all the costs associated with customer acquisition, including marketing costs and sales costs.
- Determine the number of new customers acquired during the same period.
Customer Acquisition Cost calculation:
For example, an e-commerce beauty store spent $20,000 on marketing and sales efforts in a month. During that month, they acquired 200 new customers.
Customer Acquisition Cost = $20,000 / 200 customers = $100 per customer
In this example, the beauty store averaged around $100 to acquire each new customer during that month. The store can compare the CAC to the average order value (AOV) and customer lifetime value (LTV) to balance acquisition costs and each customer’s value.
LTV to CAC comparison
The relationship between LTV and CAC is crucial for assessing the sustainability and effectiveness of a business growth strategy.
LTV represents the total value a customer is expected to bring to the business over their entire lifetime, while CAC reflects the cost incurred in acquiring a new customer.
| Comparison | Customer Lifetime Value (LTV) | Customer Acquisition Cost (CAC) |
| Profitability assessment | Estimates the total expected revenue from a customer over their entire engagement with the business. | Represents the average cost to acquire a new customer. |
| → By comparing LTV to CAC, businesses can determine if the revenue generated from a customer over time exceeds the cost of acquiring that customer. A positive ratio indicates profitability. | ||
| Marketing efficiency | Reflects the potential long-term value of customers. | Quantifies the immediate cost of acquiring customers. |
| → Analyzing the relationship between LTV and CAC helps businesses evaluate the efficiency of their marketing and customer acquisition strategies. It guides decisions on resource allocation and channel optimization. | ||
| Budget allocation | Provides insights into customers’ expected return on investment. | Represents the upfront investment required to acquire customers. |
| → Businesses can use the LTV to CAC ratio to effectively allocate marketing budgets. A favorable ratio proves that the business can afford to invest more in customer acquisition. | ||
| Retention emphasis | Encourages a focus on customer retention and repeat purchases. | Highlights the importance of efficient acquisition strategies. |
| → A healthy LTV to CAC ratio underscores the importance of maintaining and enhancing customer relationships, leading to increased customer loyalty and repeat business. | ||
| Strategic decision-making | Guides decisions on product pricing, customer service, and overall customer experience. | Influences choices related to marketing channels, campaigns, and sales strategies. |
| → Both metrics contribute to informed decision-making, ensuring business strategies align with financial goals and customer value. | ||
LTV and CAC should be regularly assessed to adapt to changes in the market, industry trends, and shifts in customer behavior. Optimizing the LTV to CAC ratio helps businesses allocate resources effectively, refine marketing strategies, and ensure a positive return on investment from customer acquisition efforts.
LTV to CAC ratio
A good LTV to CAC ratio is when the value a customer brings over their lifetime is much higher than what it cost to acquire them.
According to Hubspot, your ideal LTV to CAC ratio in a year should ideally be 3:1. This means the value derived from your customers over their lifetime should be three times the cost of acquiring them.
However, the exact ‘good’ ratio can vary by industry, business model, and company goals. Check out the research from Marketsplash below to see the ideal CAC ratio for different industries:
If your ratio is closer to 1:1, it indicates you’re spending nearly as much on customer acquisition as your customers are spending on your products. Conversely, if your ratio is higher, say 5:1, you might need to invest more in sales and marketing.
Average Customer Acquisition Cost by industry
- Organic CACs consist primarily of SEO and Organic Social.
- Inorganic CACs are primarily PPC / SEM and Paid Social.
| Industry | Organic CAC | Inorganic CAC | Combined Average CAC |
| Aerospace & Defense | $526 | $918 | $624 |
| Addiction Treatment | $357 | $506 | $394 |
| Automotive | $491 | $893 | $592 |
| Aviation | $588 | $967 | $683 |
| B2B SaaS | $205 | $341 | $239 |
| Biotech | $532 | $855 | $613 |
| Business Consulting | $410 | $901 | $533 |
| Commercial Insurance | $590 | $600 | $593 |
| Construction | $212 | $486 | $281 |
| Cybersecurity | $345 | $512 | $387 |
| eCommerce | $87 | $81 | $86 |
| Engineering | $459 | $672 | $512 |
| Entertainment | $190 | $468 | $260 |
| Environmental Services | $229 | $761 | $362 |
| Financial Services | $644 | $1,202 | $784 |
| Higher Education & College | $862 | $1,985 | $1,143 |
| HVAC Services | $211 | $549 | $296 |
| Industrial IoT | $557 | $788 | $615 |
| IT & Managed Services | $325 | $840 | $454 |
| Legal Services | $584 | $1,245 | $749 |
| Manufacturing | $662 | $905 | $723 |
| Medical Device | $501 | $755 | $565 |
| Oil & Gas | $710 | $1,003 | $783 |
| PCB Design & Manufacturing | $330 | $658 | $412 |
| Pharmaceutical | $196 | $160 | $187 |
| Real Estate | $660 | $1,185 | $791 |
| Software Development | $680 | $841 | $720 |
| Solar Energy | $235 | $707 | $353 |
| Transportation & Logistics | $436 | $732 | $510 |
Four ways to lower Customer Acquisition Cost
1. Boost organic social media engagement
You can attract more followers and potential customers by sharing valuable content that aligns with the interests and preferences of the target audience. To make your brand stand out, focus on various topics and formats, including informative articles, entertaining videos, eye-catching visuals, compelling storytelling, etc. Regularly share content and interact with your followers to maintain a solid online presence and foster community
Utilizing user-generated content (UGC) is one way to enhance organic social media reach. Encouraging customers to share their brand experiences through reviews, photos, or testimonials reinforces the brand’s credibility and is a powerful tool for attracting new customers.
2. Enhance customer retention and referral
To improve customer retention, focus on implementing personalized loyalty programs, delivering exceptional customer service, and consistently engaging with your customer base. This motivates happy customers to recommend friends and family with incentives, discounts, or exclusive offers. Enhance customer relationships by delivering a memorable experience and implementing effective referral programs. This not only encourages word-of-mouth recommendations but also nurtures a loyal customer community.
3. Harness targeted and cost-effective marketing channels
To harness targeted and cost-effective marketing channels, you can:
- Start by identifying platforms that align with your audience’s preferences and behaviors.
- Conduct thorough research to understand where your target audience is most active.
- Focus on creating content tailored to each platform to maximize audience engagement.
- Consider social media platforms, email marketing, and search engine optimization as channels that can be both targeted and cost-effective, enabling you to connect with your audience in a meaningful way without overspending.
- Leverage data analytics to continuously monitor the performance of each channel, allowing you to allocate resources effectively.
4. Maximize sales funnels and conversion rate
Through an examination of each stage in the sales funnel and pinpointing aspects for improvement, businesses can enhance the customer journey and boost conversion probabilities. This could entail refining website navigation, streamlining the checkout process, or providing personalized product recommendations based on user behavior.
For example, an ecommerce beauty store can boost awareness by:
- Creating beauty tutorials on Instagram and YouTube.
- Implementing targeted email campaigns with exclusive beauty tips and discount codes for first-time subscribers to capture their interest.
- Optimizing product pages on the website with precise descriptions and images to aid the decision-making process.
- Offering free shipping, loyalty programs, and secure checkout options.
- Sending personalized thank-you emails, gathering feedback, and providing after-sales support to enhance the post-purchase experience.
Conclusion
The Customers Acquisition Cost (CAC) is crucial for any business, directly influencing its growth and long-term sustainability. By refining these costs, businesses enhance their profitability and create a foundation for sustainable growth in a competitive market landscape.
References: Simplicity DX, First Page Sage, Forbes
