Customer Acquisition Cost (CAC)

The Value of “Customer Acquisition Cost” (CAC)

Customer Acquisition Cost (CAC) is a crucial metric in any marketing plan that you, as a seller, should not overlook. CAC refers to the costs incurred in acquiring a new customer. The value pertains strictly to new customers, not the reacquisition of existing customers.

Here’s how to calculate your CAC

Divide the total costs for marketing and sales by the number of newly acquired customers within a specific period. Be sure to consider:

  • Salaries of employees responsible for marketing and sales
  • Advertising costs such as ads, banners, or social media ads
  • Technical costs, for example, for hosting your company blog or expenses for your CRM
  • Costs for service providers like consultants, graphic designers, or agencies

CAC and Industry Benchmarks

A “good” CAC varies depending on the industry and the company. If you’re selling expensive products, a high CAC is no problem. However, if you operate in the low-price segment, a high CAC can be disastrous. But be cautious, a lower CAC is not always better! Let’s explore this further.

The Connection between CAC and CLV (Customer Lifetime Value)

To determine whether your CAC is too high, you must relate it to the CLV. Here are some ratio benchmarks:

  • 1:1 (or lower): You spend as much as your customers bring you – a risky ratio.
  • 3:1: The ideal result. You make significantly more revenue from a new customer than you spend on their acquisition.
  • 4:1 (or higher): Although you’re making a lot of revenue, you could invest more to attract even more new customers.

So, how can knowledge of your Customer Acquisition Cost help you?

  • Cost Awareness: Your CAC provides you with a clear overview of how much it costs to acquire a new customer. With this knowledge, you can make strategic decisions about how to best allocate your budget.
  • Profitability Check: A high CAC can be a warning signal that you’re spending too much to acquire new customers. Conversely, a very low CAC may suggest that you’re potentially missing opportunities for scaling.
  • Pricing Strategy: Your CAC can help you optimise your pricing strategy. If the cost of acquiring a new customer is higher than the profit that this customer brings in, you need to rethink your strategy.

Your Action Plan

  1. Calculate your CAC: Divide the total costs for marketing and sales by the number of new customers within a specific period.
  2. Compare the CAC with the Customer Lifetime Value (CLV): Your CLV should always be higher than your CAC. If this is not the case, action is required!
  3. Constantly optimise: Regularly review your CAC and adjust your strategies accordingly.

Tips to improve your CAC

  • Try to optimise your conversion rate
  • Implement solution selling
  • Turn your existing customers into brand ambassadors

Remember: A balanced ratio between CAC and CLV is crucial for your success on Amazon. Use these important metrics to get the most out of your Amazon business! Ultimately, it’s also essential that you don’t view CAC in isolation but in relation to other metrics.