Acquisition cost-sensitive businesses

What is CAC in marketing?: Well, learning how to measure the marketing strategies we implement in our business is something we should do right from the start. However, we often don’t know how to start analyzing the metrics and indicators that help us understand how we are doing.

One of the most important metrics to keep in mind is the CAC (Customer Acquisition Cost). Large companies are always analyzing what their CAC is and how they can reduce it to make their business more profitable over time.

The CAC in Marketing is not stable. It varies a lot according to the type of industry and business. Which is why we are going to tell you all about the CAC in today’s article. What is it and why should you take it into account? How to determine whether the CAC is low or high and which businesses are more sensitive to it?

Let's get started! 

What is CAC and why is it important to take into account? 

 If we asked you how effective your investments are to get new clients for your company, would you know what to answer? If you have been left rather stunned by this question, let me just say that you are going to find the information we’ll provide next very interesting.

The CAC in Marketing, as its acronym indicates, is the customer acquisition cost.  Meaning, it is the total investment you need in acquisition marketing strategies to obtain a new customer.

What does this investment include? Well, pretty much all the money that goes into advertising, sales and marketing. From advertising costs to the marketing team’s salaries to the payment of the tools you use to obtain new leads, among others.

For example, let’s say we have a gym, and we invest 100 USD per month in Instagram ads and pay 300 USD to an agency that is in charge of creating  the ads and carrying out the digital marketing strategy, our marketing investment is 400 USD. To calculate our CAC, we only need to divide this amount by the number of clients we obtain in a month, and we’ll get our CAC as a result. If, for example, we gain 20 new customers every month, our CAC would be 20 USD.

What business models are CAC-sensitive? 

 WARNING! It should be noted that the customer acquisition cost (CAC) is not the same as the cost per sale (CPS). As a rule, we use the concept of CAC in Marketing when we refer to businesses that have recurring customers.

 For example, in the gym’s case, our customer will have to pay a monthly gym membership fee. He does not buy from us just once but becomes a customer who will be buying from us every month.  If we had a portfolio business instead, it is more likely that we would use the CPS to analyze our marketing strategies’ performance since it is a product that is purchased once and is not acquired again on a recurring basis.

 There are thousands of recurring business models and there are more and more of them every day. Some examples in the digital world are:

• Subscriptions to consume entertainment (Netflix, Spotify, Disney+).

• Subscriptions to digital tools (Canva Pro, Google, Mailchimp).

• Subscriptions to purchase digital products (Adobe).

• Subscriptions to services (Amazon)

Something important to keep in mind is that there are business models that are more sensitive to variations in the CAC and should pay more attention to it. In businesses with a high margin (where the selling price is a lot higher than what the product costs us) we can afford for the CAC to be higher than usual because there is more time and a higher margin to work with to try and lower it.

On the other hand, if we sell products or services with a low margin, such as cars or cheap sunglasses, we must pay special attention to the CAC because if we fail and it rises unexpectedly, we can have a serious problem on our hands.

How to determine whether CAC is low or high? 

 If you have already taken out your calculator and quickly calculated the CAC for your business, you are probably wondering, so now what?

One of the most frequently asked questions when learning about the CAC is understanding how we can tell if our CAC is high or low. Well, this will depend a lot on your own business and industry. Why? Because you have to take into account certain elements such as the value of the product or service being marketed in each case, the length of the sales cycle or the lifetime of the customer, among other factors.

If we acquire a new customer at a cost of 20 USD but the gym fee is 2000 USD per month and customers remain in the gym for a year or more, the cost per acquisition is probably quite low. On the other hand, if we sell portfolios for 70 USD and our CAC is of 20 USD we should change our strategies because the cost of acquiring a new client is quite high, if we also take into account that the same clients will not buy portfolios from us every month.

What makes a CAC high? 

Whether the CAC in Marketing is high or low depends on a lot of factors. Thinking the CAC always remains the same is a mistake, on the contrary, it changes a lot. It goes up and down over time depending on many variables.

It is very common for our CAC to be low when we start our business. We are investing very little money and we start to reach our first customers. These are the customers who are certain that they want our product because it is niche, and the buying process is very fast, almost impulsive. Moreover, at this point in time the recommendations customers share with other customers work very well, so we owe an important part of our organic traffic to word-of-mouth.

However, when we start to grow and we need to reach more customers, we tend to invest more money and then things change. We start to clash with competitors, there are more people competing to capture the same type of customer, so the cost per customer tends to become more expensive. The channels become saturated, we have already shown our ad to all our potential customers, and we need to go and look for new channels that may be more expensive. This is where we have to make an effort to understand how to make wise investments in order to lower these customer acquisition costs and stabilize them.

Some tips to reduce CAC 

After the growth stage where everything becomes a bit chaotic and our CAC becomes more expensive, we should get to a stabilization stage.

There are a few things we can take into account to be able to reduce Customer Acquisition Costs. Write them down!

• Add value: know your customers and add a value proposition that convinces them to choose you over your competitors.

• Analyze in detail where you are investing your money.  You may discover that, out of all the ad channels where you are investing money, there is only one that is bringing in new customers.

• Build customer loyalty. This way you will be able to get more referrals and organic traffic.

Now that you know what the CAC is in Marketing, it's time to apply your knowledge and start measuring it to see how your strategies are doing.

What other tips would you give to someone who wants to reduce their companies’ CAC?