Customer acquisition cost (CAC) is how much you spend to gain new customers, and there are a variety of factors that impact this metric. These figures include marketing and ad spend, overhead and fulfillment costs, as well as the costs associated with research and understanding your audience. This calculation allows online retailers to assign a monetary amount to each new customer. This, in turn, informs more strategic, cost-effective customer acquisition so you can grow your business sustainably.
The Relationship Between CAC and LTV
In eCommerce, CAC is often associated with customer lifetime value (LTV). LTV is the total revenue you can expect from a customer throughout the duration of their relationship with your brand. The LTV to CAC ratio can tell you how healthy your business is, and how sustainable your growth is. A common suggestion is that your LTV should typically be 3 times higher than your CAC to indicate a highly profitable business. Comparing these two metrics paints a clear picture of your business, so you can gain new customers and keep them, too
How to Calculate CAC
To calculate your CAC, you simply combine the sum of all costs, then divide that number by the amount of new customers acquired in a specified period. For example:
Monthly Costs:
Ad Spend: $2,000
Team Salaries: $10,000
Software: $1,000
Total Costs = $13,000
Review Analytics to Count New Customers for this Month: 700
Calculate CAC:
CAC = $13,000 / 700
CAC: $18.57
LTV: To calculate your average customer LTV, the formula is:
Average Purchase Value × Purchase Frequency × Customer Lifespan
Strategies to Reduce CAC
Utilize Personalization
When it comes to optimizing CAC, personalization is key. Personalization allows you to segment customers by granular characteristics, like demographics or where they are in the buying journey, and deliver tailored experiences that cut costs and boost eCommerce conversions. By utilizing these segments, you can serve highly relevant ads to specic groups and retarget customers who are close to buying but need an extra push. Personalization can also lower your CAC is by powering tailored product recommendations, which drive up average order value (AOV), and, in turn, LTV.
Implement a Loyalty Program
A loyalty or referral program is a great way to incentivize customers to engage with your brand and purchase more. When you reward customers for purchasing or leaving a review, it gives them another reason to choose you over your competitors, and builds a positive, relationship with your brand over time. The key is to provide consistent value, so customers see the benefit in continuing the relationship. One example is to send post-purchase emails with a promotional offer in exchange for customer feedback. This encourages customers to buy with you again and demonstrates that you appreciate your customer’s perspective, both of which help to build trust and a positive brand identity.
Optimize Customer Support
Consistently evolving and improving the customer experience is critical to business growth. One way to do this is by optimizing your customer support: when customers are looking for answers, they should be able to find them quickly, without having to jump through hoops. Many retailers have implemented AI assistants that can help customers with basic inquiries, and they will soon be capable of more complex tasks. Improving the customer experience also builds trust and a positive perception of your brand, making it a priority when you’re looking to lower costs and improve eCommerce conversion rates. Finally, gathering feedback from your customers doesn’t just strengthen your relationship with them, but it’s also an opportunity to discover ways to improve. You can put that feedback to work by displaying ratings and reviews on your website, which can answer product questions and give customers the confidence to buy.
Audit Your Marketing Strategy
Your marketing strategy plays a key role in your CAC, impacting where and how your customers find you. While advertising on paid channels through highly relevant, personalized campaigns is important, don’t neglect your organic marketing strategy. Organic channels like SEO, GEO, and content marketing are the key to acquiring customers more efficiently for years to come, without the extra cost. User-generated content (UGC) such as ratings and reviews can be provided by your customers in exchange for special discounts and incentives, which is high-value marketing that reaches more shoppers at a fraction of the cost of traditional advertising. This type of content answers questions and attracts customers naturally, which builds trust, lowers costs, and improves eCommerce conversion rates.
Conduct A/B Testing
Finally, the best way to optimize your strategy and lower your CAC is to conduct tests to better understand areas of improvement. This starts with highly detailed and accurate data. It’s a good idea to frequently comb through your data and clean out anything that isn’t up-to-date or relevant. This process can be automated, which can help reduce overhead costs as well. A/B testing can also help you identify which campaigns are more likely to drive conversions, so you can make adjustments to your strategy as needed. Some examples of A/B tests that can specifically target your CAC optimization strategy include comparing pricing and promotional offers, creative content such as headlines, images, or email copy, and communication channels, such as email versus SMS.
Final Thoughts
Regardless of how you approach lowering your CAC, the best way to optimize your eCommerce site’s performance is by improving the customer experience. A great way to do so is through user-generated content. Revere is a ratings and reviews platform that helps retailers improve SEO, boost conversions, and enables sustainable growth. Book a demo today to get started.
