Assume you run an online clothing store. To encourage people to visit your website and buy your products, you could run social media ads, hire a sales team, or offer first-time buyers discounts. All of these come at a financial cost. This is what customer acquisition cost (CAC) involves. 

Understanding your CAC is crucial because it shows how economical your marketing strategies are. If you spend more to acquire a customer than they spend to buy your products, your business may be at risk. If your CAC is less than the revenue generated by each new customer, then your business is on the right path.

In this article, we will explain how to calculate your customer acquisition cost (CAC), discuss its significance in the e-commerce industry, and offer suggestions for reducing it in your business. 

What is customer acquisition cost (CAC)?

Customer acquisition cost is the total amount spent on acquiring a new customer. This includes employee salaries, ad spending, production costs, and other expenses. 

You need a clear understanding of your CAC to ensure your business is profitable. This also allows you to estimate the amount every customer has to pay for your business to be profitable. In other words, your business model is not sustainable if you spend more on business expenses to attract new customers than customers are paying for your goods or services.

What does CAC include?

In CAC, several expenses are associated with acquiring new customers. This includes the direct and indirect costs of your marketing and sales campaigns.

• Ad spend: The amount of money you spend on ads is called ad spend. This can be a great way to acquire new customers. To ensure you’re getting enough returns from your ad campaign, divide the revenue produced by the amount of money you spend on your ad campaign.
• Employee salaries: One of the most significant expenses in CAC for any business is the salary of staff members. AI chatbots and marketing automation can enhance your team’s workflow and raise overall productivity while reducing salary costs.
• Technical Costs: These are the expenses linked to the technology that your sales and marketing team uses. This cost must also be included in your CAC
• Publishing and PR costs: Publicising your marketing campaign involves spending money on publishing. This could be the cost of a newspaper or magazine ad, TV airtime, or paid social media advertisement.
• Content production costs: These are the expenses related to the actual process of creating content. To make a video, you’ll need different equipment, like a camera or an expert, to produce the video for you. This falls under content production costs and should be considered in your CAC.
• Inventory management: These can differ significantly amongst e-commerce companies. This cost could include energy bills and warehousing fees for businesses that sell physical goods.

How to calculate customer acquisition cost

To calculate your CAC, add up all of your sales and marketing expenses and divide them by the total number of new customers you acquired during a given period.

This is the formula to calculate CAC for your business below: 

CAC = total sales costs + total marketing costs / total number of new customers acquired. 

Suppose you spent $300,000 on sales and $100,000 on marketing and generated 200 new customers during the last two months. Your CAC to acquire a customer during that period would be: 

300,000 + 100,000 / 200 = $2,000. 

How customer lifetime value (LTV) affects customer acquisition costs.

Customer lifetime value (LTV) is the total value a customer brings to your business throughout their use of your goods and services. 

Use this formula to calculate LTV:

LTV = (average purchase value x average number of purchases) x (average customer lifespan).

The ratio of LTV to CAC establishes the relationship between CAC and LTV. This will help you decide if your business is profitable. This metric can verify whether the cost to acquire a customer is equal to, less than, or greater than the value of the customer. 

E-commerce companies should aim for an LTV: CAC ratio of about 3:1. If your LTV is higher, you earn more for every penny spent acquiring new customers. 

Six ways to reduce customer acquisition cost

Prioritise organic marketing

Customers can be attracted to your website through organic marketing strategies like email marketing, SEO, and referral marketing without paying for other forms of paid advertising. Several of these concepts require more resources than alternative approaches. As a result, remember to account for the salaries of your marketing teams and other indirect expenses related to organic marketing.

Improve retention

Acquiring new customers is more costly than keeping current ones. To appreciate your loyal customers and entice them to continue buying from you, set up retention strategies, such as loyalty programmes that provide discounts, freebies, and other incentives.

According to a 2022 survey, 79% of US customers believe loyalty programmes influence their chances of continuing business with a brand.

The benefits of having loyalty reward programmes are enormous; they increase customer retention and referrals, which lowers your CAC. 

Focus on your AOV

Pricing is directly related to CAC. One advantage of CAC is that it alerts you when your prices are too low; it may also indicate that you need to reduce your marketing costs. Pay close attention to your prices to determine whether you need to raise them if your marketing budget appears adequate. This can help you lower your CAC while increasing your average order value. 

You can also increase your AOV using several strategies, like offering free shipping, upselling and cross-selling.

Tap into the power of AI

To reduce your CAC, use AI to cut some of your marketing campaign’s human labour costs. AI can automate some of your marketing efforts; an example is descriptomizer, which Generates product descriptions that outperform your competitors—and other AI-like Chatbots. Customers can receive personalised marketing experiences from AI chatbots, automated email campaigns, and recommendation tools while you’re concentrating on different tasks.

AI chatbots can improve the customer experience by providing 24/7 customer support and lowering the expense of employing human labour. 

Display social proof

Showing your target audience that your product is useful and valuable has a significant impact on marketing to them. Fortunately, social media has made this simpler. You can now interact with your customers and show them directly what you have to offer.

You can observe your customers online using a variety of platforms that allow you to track what they say about your products. On these platforms, you can also respond to questions from potential customers. Ask your customers to leave reviews about your products online; this can help you acquire new customers without spending any money or less.

A/B test your campaigns.

Increasing conversions can result in lower customer acquisition costs. A/B testing is a great way to enhance your marketing campaigns and convert more.

To find out which variation converts better, you can create another variation of landing pages, web copy, Google Ads, and anything else you have in mind. You can also do this for your calls to action (CTAs), colour, headlines, and other elements, then adjust using the result from the test to improve your marketing efforts. 

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