Analytics

What is Customer Acquisition Cost and How to Keep it at a Minimum

CAC is the cost of getting a customer to spend on your business. Want to learn more about what customer acquisition cost is? Dive into this guide that tells you how to reduce it too.

Masooma Memon Masooma Memon on November 24, 2020 (last modified on November 30, 2020) • 22 minute read

The bitter truth is: leads don’t come on their own. You have to invest time and money to get those leads rolling and converting into customers. And this is exactly where customer acquisition cost (CAC) comes into play.

Customer acquisition cost is the amount you invest in getting a customer. More questions popping into your mind? Like, what is included in customer acquisition costs, how to cviaoalculate customer acquisition costs, and so on.

Well, don’t you worry! This post will provide you with all the answers you are looking for.

Here’s what you’ll learn:

  1. What is Customer Acquisition Cost?
  2. Why is Customer Acquisition Cost Important?
  3. How Do You Calculate CAC?
  4. What is a Good CAC Ratio?
  5. 19 Ways to Reduce Customer Acquisition Cost

What is Customer Acquisition Cost?

Customer acquisition cost is the approximate cost of getting a new customer. In other words, it’s all the marketing and sales expenditure involved in converting a prospect into a customer that buys from you.  

And, what is included in customer acquisition costs? It’s all the expenditure or investment you make, including the tools you use, any advertising costs, marketers’ salary, salespeople’s salary, and so on.

On the whole, your cost per customer acquisition needs to be low. Let’s see why is that important.

Why is Customer Acquisition Cost Important?

Are you putting in too much effort in getting leads to convert? Or, are you spending time on channels that don’t get you many leads? You can answer all this and more by knowing your customer acquisition cost.

It can also tell you if what you’re spending is delivering enough, as in how much a customer is spending back. For instance, our respondents can tell you which customer acquisition channels don’t reap much and which pay off well.

which channels offer the lowest customer acquisition cost?

In short, your CAC can tell you the value of a customer. For SaaS companies, this helps analyze their business’s scalability.

Not to mention, you can determine your costs just by looking at the difference between how much money you are investing and how much you are getting from customers. That’s how important CAC is.  

How Do You Calculate CAC?

Calculating customer acquisition cost is simple. But you can always only get an approximate value since tracking the cost of getting each customer is a bit too much work.

Here’s the formula to get an approximate CAC:

Cost of marketing + Cost of sales/New customers acquired

In short, divide the sum of all your investment for getting customers by the new customers you got in a select period and you’ll get your CAC.

Say, you’ve spent $200 in a year of marketing and sales. This investment gets you 15 new customers. So in this case: 200/20 means your CAC is 10.

What is a Good CAC Ratio?

By now, you know what is cost per customer acquisition, its importance, and how to calculate customer acquisition costs. Let’s now introduce you to another metric: the CAC ratio or CLV:CAC ratio where CLV is customer lifetime value.

Wait, but what’s customer lifetime value and why is it important? Getting a customer to buy from you doesn’t stop when the customer has purchased your product or service. Because you can always cross-sell, upsell, and if you’re a subscription-based business, keep your subscriber (for life!).

All this means you need to dedicate resources to retaining customers, so they keep spending on your business. This is where you need to calculate the CLV or the total money a customer is expected to spend on your products/service during their lifetime. The more CLV, the better.

Hence, an ideal CLV:CAC ratio has a high customer lifetime value and a low customer acquisition cost. Numerically speaking, a good business has at least a 3:1 ratio. That is, a customer spends three times more than what you spent to acquire them.

Have a ratio around 1:1? You’re spending too much. And if the CLV:CAC is anywhere north of 5:1, you have an amazing business and should consider investing more in your growth.

19 Ways to Reduce Customer Acquisition Cost

You’ve got to keep your customer acquisition cost low. But how? Here are 19 tips from the experts:

  1. Build a partner program
  2. Retarget
  3. Reduce the cost of labor
  4. Use marketing automation
  5. Build trust
  6. Tap into email marketing
  7. Invest in content marketing
  8. Leverage cost-effective marketing strategies
  9. Make the most of social media
  10. Analyze data
  11. Tap into word of mouth marketing
  12. Use a referral program
  13. Study the lifetime value of your customers
  14. Lower shipping rates
  15. Hire a secretary service
  16. Convert organic traffic
  17. Optimize customer experience
  18. Work on your SEO game
  19. Test and optimize

Let’s dive in.

1. Build a partner program

“Build a reseller program,” advises Databox’s Peter Caputa. “The best way to reduce your own customer acquisition cost is to get other companies to help you market, sell and service your customers.

If you build a partner program right, you’ll not only get your resellers to refer great fit prospects to you that close with less effort, they’ll also market you via their own marketing channels, close deals on their own and even help you retain and upsell customers. Plus, once you get a partner trained and productive, they’ll sell for you for years or maybe even forever, as the success of their business will be dependent on the success of yours.”

2. Retarget

Dan Bailey from WikiLawn opines, “I believe retargeting is the best way to impact your CAC. It’s true you can change your creatives, test out your copy, make ample use of automation, etc. But if you aren’t targeting the right people you’re never going to see this number decrease an appreciable amount.”

Related: 11 Facebook Retargeting Tips For Converting Warm Leads

3. Reduce the cost of labor

Regarding reducing customer acquisition cost, Jordan Schneider of Soundstripe recommends, “reducing the cost of labor.”

“Labor tied directly to any channel should be factored into your CAC. Here are a couple of ways I’ve reduced cost for my teams in major marketing channels in the past,” Schneider says.

“If you’re using an agency to manage your Google AdWords and social media ad strategies, you should pay close attention to the quantity of dollars being paid to them in the % commission they pull from your monthly ad spend.

This arrangement is typically fantastic early on for lower budgets, but can become wasteful at a certain monthly spend, and can even prevent you from reaching economies of scale in these channels since the cost will scale proportionally with spend.

Keep an eye on that number, once it surpasses a point where you could easily hire 1-2 managers in house at a lower cost, pull the trigger. You’ll save a boatload in the longer term and probably get yourself a quick reduction in CAC if you can find the right people and start attributing their salaries to your cost instead of the agency’s commission.

In SEO, your expenses are also tied to labor costs. A large part of that cost is typically dedicated to copywriters, as you need well-crafted content in order to achieve rankings for keywords.

One great way to reduce your CAC over time in this channel is to build a network of contracted copywriters and pay them per article instead of keeping someone on staff and paying a full-time salary. Often you can see the same output from a very talented contractor at about 40-50% of the cost of a full-time writer over the course of a year.”

4. Use marketing automation

Using marketing automation, such as lead nurture or email drip, can also help reduce your CAC.

Abhiraj Tulsyan from Stockarea shares, “Customer Acquisition Cost can be reduced effectively using automated marketing campaigns and doing them at scale.

Automated Marketing campaigns initially could be little costly but over the period of time, not only they prove economical but also more effective.

We always can benefit from economies of scale in these type of campaigns and also reduce maintenance and overhead cost associated with these campaigns to promote our business and gain customers. These automated campaigns can be launched against a specific targeted audience hence giving a better conversion rate.”

Summing up, Oliver Andrews from OA Design Services shares, “Using marketing automation or email drip can also help lower your CAC. Think about the value you can offer these potential customers. With the help of customer retention practices, you can open a new door for your users to spread word of mouth, leave good comments in your app’s review section, and build a community around your app. These are the best results for your audience to listen to you and also; reducing your CAC is beneficial to you.”

Editor’s note: Get all your conversion metrics on one screen with the Website Conversions dashboard. Find out your popular ads and track your campaign results, CPC, total website conversions, and more – all in one place.

Website Conversions dashboard

Related: 26 Effective Ways for Improving Your Customer Retention Rate

5. Build trust

Firstrate Data’s Ryan Maxwell shares their experience: “The best method we found for reducing CAC was unrelated to media channels or ad copy. It was in the reputational signals on our site. Adding full founder profiles, a phone number, details about the company history, where the company is incorporated all helped customers get comfortable with purchasing from a company they had not encountered before.”

6. Tap into email marketing

“Selling to new clients is unquestionably riskier than selling to your existing subscribers,” remarks Anton Konopliov of Palma Violets Loans.

“There’s too much uncertainty in targeting a foreign audience for your campaigns because there’s a lower chance that they’ll go for a marketer, like you, whom they’ve never heard before. Your best odds will be in activating your existing subscribers and especially luring back in those who canceled.”

Konopliov adds, “since they already know you and have experience using your products, they will most likely support you and patronize your products again.

For me, email marketing offers the lowest CAC and returns with the highest conversion rates. It’s because you’re directly communicating with your market and therefore, you have the option to customize each content so that it will fit what they expect from you.”

Deep North’s Akanksha Shrivastava also applauds email marketing for reducing your customer acquisition cost: “Reduce CAC by refraining from doing too much paid marketing and instead focus on lead generation through targeted email marketing campaigns.

It’s quite inexpensive to get the right database but marketers have to be able to optimize on the email content, subject line, landing pages etc. Don’t be afraid of running A/B tests and experimenting with different creative ideas using marketing automation tools such as HubSpot.”

7. Invest in content marketing

“There’s a reason that they say content is king, meaning that it can benefit your business in so many ways beyond simply providing informative articles for your visitors to read,” notes Al McMordie from Big Al’s Sports Picks.

“Content marketing, especially in the form of guest posts, can direct customers to your site for little or no monetary investment. Additionally, it’s great for company branding.”

Adam Rizzieri of Agency Partner Interactive also suggests you, “Invest in a committed, intentional content-driven SEO strategy. Publish no less than twice per week to your blog for 4 to 6 months to earn the ‘news site’ Google bonus. That will help you attract the most qualified, engaged customers.”

8. Leverage cost-effective marketing strategies

“When trying to find creative ways to reduce your CAC, you have to really look closely at your marketing strategies,” comments Mailbird’s Andrea Loubier.

“Email marketing is an excellent way to gain qualified leads while not completely exhausting your marketing budgets. Plus, with plenty of templates available for every occasion, it can also work well for those under time restraints.”

Alexandra Zamolo of Beekeeper suggests, “One way to lower CAC is to find budget-friendly effective marketing strategies. One such option is HARO (help a reporter out).

On this platform, companies can respond to queries posted by journalists needing quotes for an article. This is a great way to not only receive a backlink, but to position yourself as an expert in your field. This can lead to organic yet already qualified leads.”

Related: Manual Link Building Techniques That Grow & Sustain Organic Traffic

9. Make the most of social media

“One way to reduce CAC is by making the most of social media,” insists Boot Mood Foot’s Steve Johnson along with several other contributors.

Want some good news? You don’t even need to spend a dime. Johnson highlights, “We always think of marketing or paid ads. However, there is another way to grow your followers organically – by JOINING GROUPS and posting about your brand or business.

Let’s say that out of 10K members of a group, about 1-3% who see your posts could be your potential customers. And in my experience, the channel that offers the lowest customer acquisition cost is still email marketing.”

Related: 46 Expert Tips for Boosting Organic Social Growth

Greg Kozera from ELM Learning also says: “The bottom line is that social media campaigns can be very cost-effective, which can be instrumental for your customer acquisition cost. Plus, you can opt to boost posts that are already performing better than others, so that you have effectively already ‘tested’ how well-received the topic is among your followers or, as we like to call them, ‘potential customers.’”

“To keep the CAC Minimum, monitor the click-through rates, conversion rates, engagement, etc.,” suggests Stanlee from Stanlee Hospitality Supplies. “Most of us are using social media and business platforms like Facebook Ads and Linkedin.

We promote our business and services on it. To keep the CAC Minimum, monitor the click-through rates, conversion rates, engagement, etc. Based on the results, keep switching your strategy and it will help you generate more leads. Overall, it will reduce Customer Acquisition Costs.”

Kindra’s Catherine Balsam-Schwaber sheds light on paid ads: “The beauty of a paid social media campaign is that you can customize your ads to fit your target audience – all with just a few clicks. And with the reminder to boost a post that is already performing quite well, you can even see the topics that are engaging your audience on a wider scale. With social campaigns still a budget-friendly option, they can still keep your CAC low.”

For example, Simple Sheets’ Paul Burke shares, “Facebook is our largest acquisition channel. Rather than send prospects to our home page, we are always testing landing pages and squeeze pages that convert at a far higher rate. This has reduced our CAC in half from where we originally started.”

Related: Facebook Ad Placements: How Do They Compare & Which Perform Best?

10. Analyze data

Jonathan Aufray of Growth Hackers Services adds to the ways you can reduce your cost acquisition cost. “A great way to reduce your customer acquisition cost is by deeply analyzing your data. You want to understand what drives your leads and sales and most importantly what doesn’t and that you can get rid of or optimize.

Once you find channels that aren’t moving the needle as much, optimize those channels or even kill them so you can double down on what works.”

Related: 22 Ideas for Using Data to Inspire Your Content Marketing Strategy

11. Tap into word of mouth marketing

Eureka’s Tommy Fang writes, “ the best way to reduce CAC is to invest in a product that users will tell their friends about, effectively reducing CAC to 0. We’ve grown to over half a million dollars without spending a single dollar on ads, referral credits, etc. People tell their friends about Eureka for free.”

12. Use a referral program

“Set up a referral program that incentivizes current customers through a freemium product or service extension. All this reduces total CAC,” outlines altLINE Sobanco’s Jim Pendergast. “This kind of referral program kills two CAC birds with one stone:

✔ First, it rewards currently loyal customers, who we all know by now contribute far more to your bottom lines than frequently sourcing and recycling new ones.

✔ Second, it leads to natural up- or cross-sell opportunities down the line. Customers now have a taste of premium aspects of your products or services or extensions they were considering before but never jumped on. They’ll be far more likely to now opt to pay for down the road for those add-on goods and services to maintain the freemium function, if not purchase additional ones.”

Thomas Bolt of Big EVAL agrees, “Having a well-thought-out referral program can lower your CAC, as well as spread news about your company in the best way possible – via word of mouth. When you know that you have a satisfied customer, ensure that they have a direct, simple way to provide your company information as a referral. You can even offer an incentive if the potential client opts to try your services or products.”

13. Study the lifetime value of your customers

Reminding of what is customer acquisition cost, Firewire Digital’s Shonavee Simpson-Anderson says, “Customer Acquisition Cost is an approximation of how much you spend to acquire a customer or convert a lead, you can then assess the return you get on acquiring a customer by looking at the lifetime value of a customer.

If your CAC is higher than the lifetime value of a customer, you’ll be looking at a negative return on investment, so businesses are always looking for ways to reduce their CAC.”

Simpson-Anderson continues, “One way you can reduce your CAC is to minimize how many paid ads you do – any time you are paying for exposure to potential leads, depending on the time you put into creating them, this will have a higher CAC as you need to account for the cost of content creation, marketing strategy, optimization and funnel design on top of your ad spend.

So one way to really reduce your CAC is to eliminate ad spend where you can and just do all the things like SEO and digital marketing, which you have to do regardless of whether you do ads or not, and do them really really well.”

Related: 18 Tips for Increasing Your Customer Lifetime Value (CLTV)

14. Lower shipping rates

“For e-commerce businesses selling physical products, we see the shipping cost directly affecting the conversion rates, giving a higher price per customer if the shipping cost is too high,” observes Nets Insights’ Jonathan Delfs.

“Our tests show that lowering the rate for shipment improves the conversion rate and lowers the cost of customer acquisition. Do keep an eye out for your profit, so this maneuver won’t cost you more money than it’s saving you. Sometimes a high CAC is worth it,” continues Delfs.

Delfs also makes another point that Simpson-Anderson made above: “Another way of approaching a high CAC is to combine it with analysis of LTV (lifetime value), to see if a higher CAC actually gives a longer lifetime of the customer and higher revenue generated by them. Lowering CAC is not always the answer. Look out for lowered revenue or any indications that you are getting a ‘discount segment’. Cheap is not always the answer.”

15. Hire a secretary service

“Hiring a secretary service can be a great way to reduce CAC as it ensures that you never miss a call,” recommends Lars Larsen from AdNudging.com.

“In our experience, many small business owners are often too busy to answer the telephone, and having a secretary service provides a flexible and cheap insurance policy against missed calls.”

16. Convert organic traffic

“There’s an adage in business: sometimes it’s cheaper to retain your current clients than find new ones,” shares Burbz’s Kenny Dahill. “The same can be said about reducing your acquisition cost, except it’s cheaper to retain your current visitors than find new ones.

Burbz has found success in our SEO and content marketing. “Significantly growing our organic traffic as well as registrations. While SEO is highly recommended for its effective low-cost acquisitions, the work does not end once the user is on site.

After addressing our organic traffic, we focused on conversions and getting users to the desired page to convince them to register. Through CRO, our team has been able to improve pages up to 30% increase for registrations. This significant increase helps reduce our customer acquisition cost as it makes our SEO marketing more efficient. We achieved this by using tools such as Google Optimize and CrazyEgg to observe user behavior and A/B test.”

Editor’s note: Get a 360-degree view of your organic traffic including essential metrics like sessions by post, time on page by post, and more on one screen with this free Organic Blog Traffic Dashboard template.

Organic Blog Traffic Dashboard template

On a similar note, Peter Thaleikis from RankLetter says, “For many online businesses, intensive A/B testing is the key to increase conversion rates and reduce customer acquisition costs (CAC). You can test pretty much any element of your website: headings, texts, graphics, charts, CTAs, and of course various design elements.”

Thaleikis advice for you is to “start small with one change to establish your internal process for A/B testing, track the results, and evaluate them once your dataset is large enough. If the effect is minor, drop the change and run the next test. Large companies such as Amazon and Google are known to run hundreds of micro A/B tests at the same time. Due to the large scale of their websites, these tests are barely noticeable for the untrained eye.”

Regarding A/B testing, Lily Ugbaja of Dollar Creed comments, “Without real data, everything is simply speculation. Ads may work for site A, while SEO works best for site B. So to reduce CAC, it’s best to start split testing immediately. What type of pages convert organic visitors better? What converts social visitors better?

These are answers we can find with A/B Testing and effectively reduce CAC by allocating resources to where they are best suited.”

Related: How to Run Effective A/B Tests According to 28 Marketing Experts

“One strategic way to reduce CAC is boosting conversion rates by focusing on the content’s copy, CTA layout, structure, testimonials, emails etc,” shares Slyecom’s Pir Fahad Momin. “One other way is to retarget potential customers and get their attention through email marketing and other such tools.”

17. Optimize customer experience

“This is a broader one, but its Customer Experience Optimization,” writes Will Laurenson

from Monkey Blocks in response to what is customer acquisition cost and how to reduce it.

“You can optimize your ads as much as you like, but there will always be a limit there, and the costs are always increasing. Focus on the customer once they’re on your website.

Treat them like a person and build a relationship with them.

Provide value and information alongside your products, have good customer support in place, offer a variety of payment & delivery options. If you can create a fantastic on-site experience, and follow that up with an amazing post-purchase flow you’ll see huge benefits,” notes Laurenson.

“You’ll retain customers better and increase the value from them, you’ll boost word of mouth, reviews, and general brand exposure, which will help drive CAC down across your paid channels as well.

A highly underrated area. While your competitors obsess over small tweaks to their ad copy and creative, if you work on the on-site experience you’ll see 10x the growth.”

18. Work on your SEO game

“SEO reduces customer acquisition costs by as much as 75% compared to paid media,” highlights Jonas Sickler of Terakeet. “That’s because SEO allows you to capture customers before they know about your brand by targeting top-of-funnel keywords that take longer to convert and would be too expensive for PPC.

Related: 14 Tips for Planning and Boosting Your PPC Campaign Performance

Additionally, companies can reduce CAC by trimming navigational branded keywords from their ad spend that cannibalize free organic traffic. For example, if someone Googles ‘Target’ then they either want to find the nearest store or the website. Buying that exact match keyword just wastes ad spend and increases CAC.

Finally, because SEO produces more sustainable results, organic search acts like a flywheel that keeps producing traffic. Whereas paid traffic immediately vanishes the moment you stop buying ads.”

Viola Eva of Flow Research Collective echoes the same: “You can reduce your CAC by ensuring that you have an absolutely stellar SEO strategy in place.

When you can draw visitors to your site organically, then it’s not costing you a penny – minus the time you’ve spent implementing SEO on your site, including your blog posts. As you begin to rank for keywords, then we all know what will happen as you being to climb closer and closer to Page 1.

Besides begin in the cool kid’s club, you’ll see your site traffic increase dramatically, thereby gaining more and more qualified leads.”

Related: SEO for a New Website: Here’s Everything You Need to Know to Start Ranking

19. Test and optimize

The last tip to reduce customer acquisition cost comes from Nicole Fortunaso of Ctrl+Alt Marketing who says, “From my experience Customer Acquisition Cost, the only way that leads to its lowering is experimentation with the new, testing and optimization. Whether your business is new or established you and your team need to have this mindset.”

“When testing you need to cast your net wide and focus on having a larger budget with the goal of bringing it in. When you start small sometimes you miss opportunities to really optimize your CAC. The second aspect of consideration is you and your teams’ strengths against the type of business you have- are you good at collecting emails, writing content, social or paid search.

You will find certain teams and their brand are better suited to certain avenues and can optimize CAC through key channels. Lastly, you need to make sure you have a mix of channels. I have seen many businesses poor their efforts into just one channel and not experiment with anything else, when all of a sudden the market shifts and that channel is not as effective as you used to be – this is when your sales suffer and you are really left scrambling,” Fortunaso goes on.

“Ride the waves and experiment with a variety of channels. And if a channel is not working for you don’t be shy to cut it, but maybe check on it again at a later time – the customer mindset and the way they interact with brands changes – as marketers we need to adapt!”

Wrap up

There you go, folks. You now have a checklist of 19 ways you can reduce your CAC along with an answer to what is customer acquisition cost. So what are you waiting for? Get to work.

About the author
Masooma Memon
Masooma Memon Masooma is a freelance writer for SaaS and a lover to-do lists. When she's not writing, she usually has her head buried in a business book or fantasy novel.

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