Consumers are being exposed to more advertisements than ever before. Businesses focused on growth must develop acquisition programs that capture their target customers’ attention and drive them to convert.
Invest too little in acquisition, and consumers may do business with your competition. But spend too much, and your acquisition model may become unsustainable. That’s where Customer Acquisition Cost (CAC) comes in.
Customer Acquisition Cost (CAC) is an essential marketing metric that allows businesses to understand how much sales and marketing budget they are spending for every new customer acquired.
By calculating CAC and comparing it with other key marketing metrics, such as Customer Lifetime Value (CLTV) and payback period, you can analyze the efficiency of your acquisition model and ensure you’re maximizing marketing investments.
To calculate Customer Acquisition Cost, simply divide your total sales and marketing spend for a given time period by the number of new customers acquired during that time period.
Total Sales & Marketing Cost
_______________________________ = Customer Acquisition Cost
Number of New Customers Acquired
For example, if your business spent $25,000 on sales and marketing in 2023, and acquired 1000 customers, your CAC for the year would be $25.
$25,000
______________ = $25
1000 customers
To calculate CAC accurately, it’s important to determine how you’ll define Total Sales & Marketing Cost. As a rule of thumb, it’s best to include all costs related to team member salaries, tools, and advertising fees to ensure your CAC accurately reflects your balance sheet.
You can further hone your analysis by calculating the CAC of a particular part of your Sales and Marketing strategy. Paid CAC, for example, focuses exclusively on sales and marketing costs invested in paid marketing channels (such as PPC and display advertising), as well the salary and tool costs that support those channels. Blended CAC, on the other hand, focuses on costs for all marketing and sales channels–paid channels as well as those that aren’t paid, such as content marketing.
Customer Acquisition Cost encompasses many variables within the customer journey. As such, there are numerous optimizations you can make throughout the customer journey that will lower customer acquisition costs.
1. Allocate advertising budget accordingly to high-intent users
Customers engage with your brand at various stages of the customer journey. While some may be exploring their problem for the first time, others may be deeply familiar with your solutions and evaluating them alongside your competitors’.
As you structure advertising campaigns, it’s important to ensure that you are investing an appropriate percentage of your advertising budget in campaigns that drive high-intent users to convert. Focusing on capturing the interest of high-intent users enables you to acquire more customers per dollar invested and lower customer acquisition costs.
Google Ads, for example, allows you to target advertising campaigns based on search keywords. By designing campaigns around high-intent keywords, such as “best barbecue in Austin”, you can ensure your ad budget is being invested in capturing customers that are ready to buy.
Another method for targeting campaigns based on intent is to design retargeting programs. Analytics solutions such as Google Analytics and Amplitude enable you to track which users are browsing your digital properties and understand how they’re engaging. Based on that data, you can design campaigns that re-market to users that have previously explored your products but haven’t yet made a purchase, driving them to revisit your solution and convert.
2. Increase acquisition through organic channels such as social media and content
Just as investing in engaging high-intent users is important, it’s also important to ensure that you’re not over-investing your advertising budget in campaigns targeted at low-intent users.
Developing brand awareness is important, but you may consider leveraging a mix of paid and non-paid channels to drive top-of-funnel engagement in order to reduce wasted ad spend.
Encouraging customers to create User Generated Content, for example, can introduce authentic stories about your product into the market and build a sense of community around your brand. Content marketing and social media can provide educational and/or entertainment value to your target audience, creating a positive brand association and increasing product awareness.
While these programs may require upfront tooling and personnel costs (which should be included in your CAC calculation!), they will scale over time and allow you to allocate your advertising budget in converting high-intent users.
3. Improve the post-click experience to maximize conversions
Capturing your target customers’ attention with compelling campaigns is a great start, but for most businesses, clicks do not equal revenue. To lower customer acquisition costs, you can also focus on improving the post-click user experience.
Two key ways that you can improve the post-click experience are:
4. Optimize campaign targeting with audience exclusions
It doesn’t matter how great your user experience is if your campaigns are targeting the wrong consumers. Engaging consumers that aren’t interested–or worse yet, customers that have already purchased–will result in wasted marketing budget and high CAC.
Create audience segments of your active customers, and use them as suppression lists on your acquisition campaigns. This will ensure that you’re not wasting ad spend on active customers, and allocating more budget to prospective customers.
If you’re interested in learning how you can set up suppression audiences across channels such as Facebook, Google, TikTok in just a few clicks with WasteNot, you can see more here.
As you’re setting up campaign exclusions, you can also leverage negative keywords to exclude irrelevant audiences from your paid search campaigns. Negative keywords enable you to prevent your campaigns from being served on certain specified search terms. For example, a campaign promoting reading glasses may want to define negative keywords such as “wine glasses” and “drinking glasses” to prevent their ads being served to users on the hunt for drinkware.
Negative keywords are available in Google Ads across Search, Display, and Video campaigns. By preventing your budget from being invested in the wrong users, you can ensure more budget is allocated to your target audience, driving conversions and increasing ROAS.
5. Increase referrals
A recent Nielsen survey found that 92% of consumers trust product referrals from friends and family more than any other form of advertising. No matter how creative your campaigns, authentic ‘word-of-mouth’ will always be a more effective method of spreading brand awareness.
Consider incentivizing your happiest customers to share referral discounts with their networks. Referral programs have little cost outside of any discounts or offers included, enabling you to drive acquisition without significant spend. Furthermore, research has shown that customers acquired through word-of-mouth campaigns have a 37% higher retention rate than customers acquired through advertising channels, making them more valuable to your business.
John Joe Smith, founder and CEO of WasteNot, is hosted by Tom Triscari, founder of Quo Vadis, for a Q&A conversation on the future of audience suppression.
Many advertisers waste up to 40% of their ad budgets due to inefficient targeting, and they aren't even aware of it. In this article, we'll walk through how brands can use modern audience suppression strategies to improve advertising efficiency and performance.
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WasteNot is the only platform focused on allowing marketers to activate and optimize real time ad exclusions across all biddable media.