Customer Acquisition Cost: The One Metric That Determine’s Your Company’s Profitability or Failure
Customer acquisition cost (CAC) is a metric that has been growing in use, along with the emergence of Internet companies and web-based advertising campaigns that can be tracked.
Traditionally, a company had to engage in shotgun style advertising and find methods to track consumers through the decision-making process.
Today, many web-based companies can engage in highly targeted campaigns and track consumers as they progress from interested leads to long-lasting loyal customers. In this environment, the Customer Acquisition Cost (CAC) metric is used by both companies and investors.
CAC, as you probably know, is the cost of convincing a potential customer to buy a product or service. In this article, we will explain the CAC metric in more detail, how you can measure it, and what steps you can take to improve it.
What the CAC Metric Means to You
As mentioned above, the CAC metric is important to two parties: companies and investors. The first party includes outside, early stage investors who use it to analyze the scalability of new Internet technology companies. They can determine a company’s profitability by looking at the difference between how much money can be extracted from customers and the costs of extracting it.
For example, in terms of the upstream oil market, if an oil supply is in an area requiring heavy infrastructure investments, the amount applied to extract the oil may be greater than its market price per barrel.
Investors view Internet-based companies through the same lens. They are concerned with the current relationship, not on future promises of improving the metric, unless they can be justified.
The other party interested in the metric is an internal operations or marketing specialist. They use it to optimize the return on their advertising investments. In other words, if the costs to extract money from customers can be reduced, the company’s profit margin improves and it makes a larger profit.
Then, investors are more interested in providing the company with the resources it needs, partners are more committed to growth, and the company can use the improved profit margins to pass the value to its customers for a greater market position.
How You Can Measure CAC
Basically, the CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. For example, if a company spent $100 on marketing in a year and acquired 100 customers in the same year, their CAC is $1.00.
There are caveats about using this metric that you should be aware of when applying it. For instance, a company may have made investments on marketing in a new region or early stage SEO that it does not expect to see results from until a later period. While these instances are rare, it may cloud the relationship when calculating the CAC.
We suggest that you perform multiple variations to account for these situations.