Have you truly considered the cost of acquiring a new customer? While you may keep an eye on how much it costs for your sales team to attend conferences or you itemize travel expenses for pitches to potential clients, it’s easy to lose sight of overall customer acquisition costs (CAC) when you’re busy managing the multiple aspects of your business. For every company that runs on recurring revenue, acquiring new customers is the momentum that keeps your business afloat. However, many start-ups and fledgling companies do not give their CAC the attention it deserves, diminishing their profitability. Especially in early-stage companies, where capital is less available, fully understanding and efficiently managing your CAC will impact your success.
Explore the meaning of CAC, the expenses included within it, and the relevance it has for your company.
What is Customer Acquisition Cost (CAC)?
In its most basic form, your CAC is simply the cost associated with bringing in a new client, divided by the number of new customers you acquire in a period—be it a month, quarter or year.
4 Costs Associated With Customer AcquisitionWhen defining your CAC, look to these specific areas of your business and the costs associated with each:
1. Sales & Sales Team SalariesWe’ve seen it countless times: A charismatic CEO starts a business and then hires a sales team that can’t sell the product as well as they do. The most important hire a CEO can make is a strong head of sales. The costs associated with operating your sales team are undoubtedly the most significant percentage of your CAC but often the most justifiable. While hiring quality salespeople may cost more upfront, their long-term value justifies the hires. Their salaries impact your CAC, but the best salespeople quicken your sales cycle and decrease acquisition costs.
2. Marketing & Marketing Salaries
The second factor in your CAC is your marketing investment. Presenting your company’s best image to clients is a sunken cost of acquiring new business. Are you employing a marketing director? How about a vendor to run your blog or social media sites? The resources you have allocated to marketing efforts are conducting outreach to generate leads. Any salaries or freelance costs to run your marketing machine adds to your CAC.
Do your salespeople attend conferences or speak at events? Do they make in-person visits to potential clients? While these lead generation activities bring in new clients, you must consider the cost of traveling to the event, meals, and accommodations.
Whether developed in-house or outsourced, a new website is arguably the most valuable lead generation asset, but it requires an investment of time and money to complete.
How Can I Boost My Return on CAC Investment?
For every investment you make in business, you seek a high return. The costs associated with customer acquisition are an investment. But how can you use this information to improve your CAC numbers? When you decrease customer acquisition costs, you’ll increase the ROI for your sales and marketing investments. There are five ways to boost ROI on your CAC investment:
1. Calculate Your Metrics Regularly
The best way to accurately depict your CAC is to calculate it and other customer acquisition metrics regularly. When you do so, you’re able to monitor these metrics to determine areas of improvement and other areas that need more work. You will gain greater insight into the value of your CAC and how to decrease costs as much as possible.
2. Shorten The Time It Takes To Regain Your CAC
Beyond calculating your CAC, CLTV, and churn rates, you should also calculate the amount of time it takes to regain the cost of pursuing a customer after signing a contract. The shorter this amount of time is, the stronger your company is financially. This increases your operating efficiency and cash flow and justifies higher CAC numbers.
3. Streamline Your Sales Cycle
How long does it take to turn a prospect into a paying customer? For some software companies, it takes anywhere from 90 to 270 days to acquire a client. That is a long time of investing money into the sales process before you receive payment. To have a worthwhile return on your CAC investment, your sales cycle should be as short as possible. You’ll spend less time pursuing customers, which means less time and energy for your sales team. The faster a customer signs a contract, the faster your sales team can move onto another prospect, and the faster you’ll regain your CAC.
4. Focus On Lead Generation
At the heart of your CAC is lead generation. You are investing in marketing and sales costs to generate viable leads, preferably at the bottom of the sales funnel. If your CAC is higher than it should be, look for lead generation options outside high-priced sales outreach. Think outside the box. What are some sales alternatives that could drive leads yet present little cost for your company? If you’re a SaaS startup, an option like a free trial for your product is a practical sales alternative. Consider revisiting and optimizing your website.
Explore options like offering a free consultation to drive leads, social media pay-per-click campaigns, or email outreach. Find successful, cost-effective ways to drive qualified leads.
5. Sell Monthly Recurring Revenue
Some businesses fall into the trap of being satisfied with any sale, including one-time projects for customers that may not return. If you sell to a customer that only pays once, it is difficult to justify a high CAC. When you must spend money to close deals, you should be selling recurring revenue that you can count on for the future. Refocus your sales efforts on signing customers with interest in recurring revenue for a higher return on your CAC.
The Impact of Customer Acquisition Costs on Your Business
For startups to have a viable business model, CAC is a critical metric to track. Because startups are in constant need of new clients and monthly recurring revenue generation, the costs associated with those enterprises carry a lot of weight on profitability.
View your CAC as an investment in growing your business. These are costs you must undertake to increase your cash flow and boost revenue. Consider including your CAC in your profit and loss statement metrics, tracking it monthly to evaluate potential improvements.
Decreasing your customer acquisition cost is a savvy way to increase your profitability and your cash flow. Focus on streamlining your sales process and selling more recurring revenue. When you do, you will increase the positive return on your CAC investment and garner more income for future growth.
Do you have questions about your CAC? Contact our financial experts today.