Educational
Measuring Average Order Value - AOV
November 17, 2024
The importance of Customer Acquisition Cost (CAC) in e-commerce, detailing how to calculate it and offering actionable strategies to reduce it, ultimately improving profitability and helping businesses scale efficiently.
For fast-moving consumer goods businesses, the e-commerce sales channel can be a vital part of strategy for both brand awareness as well as high profit margins. There are a few key metrics for tracking performance in this space and today I’ll dive into the first — customer acquisition costs.
It is critical to know how much it costs to bring in new customers to scale effectively. This is where Customer Acquisition Cost (CAC) comes into play. CAC helps you understand the expense of acquiring a customer and how effectively your marketing and sales efforts are performing. In this post, I’ll dive into what CAC is, how to calculate it, and actionable steps you can take to reduce it. Ultimately, if your CAC is too high, you’d be better off paying people with cold hard cash to buy your product instead of paying for ads.
Customer Acquisition Cost (CAC) represents the total cost of acquiring a new customer. This includes all marketing, sales, and promotional expenses required to convert a shopper into a paying customer. By tracking CAC, you gain a clear picture of how efficiently your business is attracting new customers and whether your marketing efforts are generating returns.
A lower CAC is ideal because it means you’re spending less money to gain each new customer, leaving more room for profit. However, CAC alone doesn’t tell the full story; it should always be analyzed alongside other metrics like Customer Lifetime Value (CLV) and Average Order Value (AOV), which I’ll cover in future posts.
Calculating CAC is straightforward. You’ll want to sum all the costs involved in acquiring customers during a specific period and divide that by the number of customers acquired in that same period. The formula looks like this:
CAC = Total Acquisition Costs / Number of New Customers
Example:
Let’s say over the course of a month, your company spent $5,000 on marketing, including paid ads, email marketing software, and promotional events. During that same month, you acquired 100 new customers.
Your CAC would be:
$5,000 / 100 = $50 per customer
This means it costs you $50 to acquire each new customer. While this number isn’t particularly useful on its own, comparing it to the revenue each customer generates is where it becomes truly valuable.
Knowing your CAC is essential for managing profitability. If you’re spending $50 to acquire a customer, but that customer only makes one purchase for $40, your business will lose money. On the other hand, if that customer spends $200 over time, your $50 acquisition cost is well worth the investment.
Now that we’ve covered how to calculate CAC, let’s explore how you can lower it. Reducing CAC allows you to either acquire more customers with the same budget or maintain profitability while scaling your business. Here are some key strategies:
Start by identifying the marketing channels that deliver the highest return on investment or require the least amount of money to get a new customer. Use data from paid ads, email marketing, social media campaigns, and SEO efforts to see which channels are bringing in the most valuable customers at the lowest cost. Double down on these channels and reallocate budget from the underperforming ones. One of the common metrics used to measure the success of an individual or set of ads is ROAS. Return on Ad Spend, or ROAS, tells you how many dollars of sales you make per dollar you spent. Keep in mind that it costs money to buy your product and send it to the customer, so ROAS needs to be well above $1 to be a sustainable business.
Tip: Set up conversion tracking and attribution models to understand where your customers are coming from and which campaigns are driving results.
Warning: If I see an ad for your product on Facebook but then Google it, your system may say that I found it through direct Google search. It can be really difficult to properly attribute where someone came from for a purchase.
Focusing on reaching the right audience with the right message is a powerful way to reduce CAC. Review your buyer personas and refine your targeting based on demographics, interests, and purchasing behavior. The more relevant your message is to your audience, the higher your chances of conversion, which reduces your acquisition cost.
Tip: A/B test different ad creatives, messaging, and offers to see which resonates best with your target audience.
Paid marketing is often the biggest contributor to CAC, but organic channels like search engine optimization (SEO) and content marketing can help reduce those costs over time. Investing in high-quality content, such as blog posts, social media, and product guides, will attract potential customers to your site without the constant need for paid advertising.
Tip: Start by focusing on SEO to rank for relevant keywords and drive traffic to your site. This takes time but can significantly reduce CAC in the long run.
Sometimes, potential customers don’t make a purchase on their first visit to your site. Retargeting campaigns allow you to stay top-of-mind for people who have visited your site but haven’t yet converted. By using retargeting ads or email campaigns, you can nudge these prospects back to your site and encourage them to complete their purchase.
Tip: Create retargeting ads that highlight the value of your products, special offers, or customer testimonials to re-engage visitors. For individuals that add items to the cart but don’t make the order, make sure you have flows for abandoned cart outreach.
While lowering CAC is important, it’s equally important to keep in mind how much value each customer brings over time. Customer Lifetime Value (CLV), which we’ll cover in detail in a later post, helps provide context to your CAC. If your CAC is high, but the customer generates a lot of repeat purchases, the higher cost may be justified. It’s all about finding the right balance to ensure long-term profitability.
Customer Acquisition Cost is a critical metric for understanding how much you’re spending to grow your customer base. By regularly calculating CAC and implementing strategies to reduce it, you can improve the efficiency of your marketing efforts and create a more profitable business. Remember, a lower CAC means more profit on each sale, and more profit means more opportunities to grow and reinvest in your business.
Stay tuned for our next post, where I’ll dive into Average Order Value (AOV) and explore how increasing the value of each purchase can further boost profitability.
