Term: "Customer Acquisition Cost (CAC)"
Definition
Customer Acquisition Cost (CAC) is a vital business metric that quantifies the total cost associated with acquiring a new customer, including all marketing, advertising, and sales efforts. CAC is calculated by dividing the total costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. For example, if a company spent $1,000 on marketing in a year and acquired 100 customers, the CAC would be $10 per customer.
Understanding CAC is crucial for businesses as it helps in evaluating the effectiveness and efficiency of marketing strategies and determining the return on investment (ROI) for acquisition efforts. A low CAC relative to the Customer Lifetime Value (CLV) indicates a healthy, sustainable business model, while a high CAC suggests that a company may be spending too much to attract each customer, which can be unsustainable in the long run.
Businesses strive to optimize their CAC through various means, such as improving marketing campaigns, targeting the right audience more effectively, enhancing the sales conversion process, and leveraging more cost-effective channels for customer acquisition. Keeping CAC in check is essential for maintaining profitability and ensuring long-term business growth.