RETAIL GLOSSARY

# Customer Acquisition Cost (CAC)

The cost of acquiring a new customer, calculated by dividing the total marketing and sales expenses by the number of new customers acquired.

## What is Customer Acquisition Cost (CAC)?

Customer Acquisition Cost (CAC) is the average cost of acquiring a new customer. It is calculated by dividing total marketing and sales expenses by the number of new customers acquired. CAC helps businesses evaluate the effectiveness of their customer acquisition strategies and make data-driven decisions. It provides insights for optimising marketing channels, identifying profitable customer segments, and improving ROI.

## How CAC works

• Identify Marketing and Sales Expenses: Start by identifying all the costs associated with marketing and sales activities aimed at acquiring new customers. This may include advertising costs, promotional expenses, marketing campaigns, sales team salaries, commissions, and any other relevant costs.

• Determine the Acquisition Period: Define the specific period for which you want to calculate the CAC. It could be a month, a quarter, or a year, depending on your business needs and goals.

• Calculate Total Acquisition Costs: Add up all the marketing and sales expenses incurred during the defined acquisition period.

• Count the Number of New Customers: Determine the number of new customers acquired during the same acquisition period.

• Calculate CAC: Divide the total acquisition costs by the number of new customers acquired. The result is the Customer Acquisition Cost.
For example, if a retailer spent \$10,000 on marketing and sales efforts in a month and acquired 100 new customers during that period, the CAC would be \$100 (\$10,000 divided by 100).

By regularly tracking CAC, retailers can assess the effectiveness and efficiency of their customer acquisition strategies. It allows them to evaluate the profitability of their marketing campaigns, identify areas for improvement, and make data-driven decisions to optimise their customer acquisition efforts.

## Pros of CAC

1. Cost Efficiency: CAC helps retailers evaluate the cost-effectiveness of their customer acquisition strategies. By understanding how much it costs to acquire a customer, retailers can optimise their marketing and sales activities to minimise expenses while maximising customer acquisition. This can lead to improved cost efficiency and better allocation of resources.
2. Performance Evaluation: CAC provides retailers with a metric to assess the performance of their marketing campaigns and sales efforts. By tracking CAC over time, retailers can monitor changes and trends in customer acquisition costs. This information allows them to evaluate the effectiveness of different marketing channels, campaigns, or sales strategies and make data-driven decisions to improve performance.
3. ROI Assessment: CAC helps retailers determine the return on investment (ROI) for their customer acquisition activities. By comparing the CAC to the lifetime value of a customer (CLV), retailers can assess the profitability of their customer acquisition efforts. This information enables them to focus on acquiring customers with higher CLV, which can lead to increased revenue and long-term profitability.

## Cons of CAC

1. Limited Focus: CAC primarily focuses on the upfront cost of acquiring customers and may not capture other important factors such as customer retention and lifetime value. By solely focusing on the cost aspect, retailers may overlook the long-term profitability of acquiring customers and fail to consider the potential value they bring beyond the initial acquisition.
2. Complexity and Variability: Calculating CAC can be complex and challenging, especially for retailers with multiple marketing channels and campaigns. Different channels may have varying costs, and accurately attributing customer acquisition to specific marketing efforts can be difficult. Moreover, CAC can vary over time due to changes in marketing strategies, customer behaviour, and market conditions, making it challenging to establish consistent benchmarks.
3. Lack of Context: CAC alone may not provide a complete picture of the effectiveness and success of customer acquisition efforts. It is essential to consider other metrics such as customer lifetime value (CLV), customer satisfaction, and overall business growth. Focusing solely on CAC without considering these broader aspects may result in a narrow perspective and overlook the overall impact of customer acquisition on the business.

## FAQ

Below you will find answers to common questions
What is the average Customer Acquisition Cost (CAC) for our online marketing campaigns?
The average Customer Acquisition Cost for our online marketing campaigns is \$50. This includes the cost of advertising on various digital platforms, such as social media ads and search engine marketing. We calculate the CAC by dividing the total marketing expenses by the number of customers acquired through these campaigns. It is important to track the CAC regularly to assess the effectiveness of our marketing efforts and optimise our budget allocation.
How does the Customer Acquisition Cost (CAC) vary across different marketing channels?
The Customer Acquisition Cost varies across different marketing channels. Through our analysis, we have found that the CAC is lower for organic search and email marketing channels compared to paid advertising channels. This indicates that our organic and email marketing efforts are more cost-effective in acquiring new customers. However, it's important to note that the CAC may fluctuate over time due to changes in consumer behaviour and market dynamics. We continuously monitor and evaluate the performance of each marketing channel to optimise our customer acquisition strategy.