Why Customer Acquisition Cost Is Important in Digital Marketing & Ecommerce

Importance of Customer Acquisition Cost

This post might sound a bit technical to non-marketing or e-commerce folks but anyway, anyone can still learn from it. I took my time to study what CAC really entails and how relevant it is in marketing and eCommerce as a whole. Someone is saying right now what is CAC? Is it Corporate Affairs Commission? Hell No! 😀

CAC in the digital marketing and eCommerce environment is the acronym for Customer Acquisition Cost. It is the cost inquired in acquiring a customer (CAC) it literally means the price you pay to get a new customer. In its simplest form, it can be worked out by:

How Can You Measure CAC

Basically, the CAC can be calculated by simply dividing all the 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 $100 on marketing in a year and acquired 100 customers in the same year, their CAC is $1.00. In a nutshell is dividing the total costs associated with an acquisition by total new customers, within a specific time period.

Why CPA is Different From CAC

Some people actually confused cost per acquisition and cost per action although both metrics are used interchangeably they are slightly different in function, however sometimes cost per action might mean cost per acquisition depending on the goal set by advertisers or business owners.

Cost Per Action or CPA (sometimes known as Pay Per Action or PPA; also Cost Per Conversion) is an online advertising pricing model, where the advertiser pays for each specified action carried out on their website (a purchase/order, a form submission, email subscription and so on) linked to the advertisement.

Cost Per Acquisition is a method of advertising whereby the advertiser only pays when an advert delivers an acquisition, in terms of the customer acquired by the advert. Moreover, CPA seems to be very effective for an advertiser to pay because they only pay when the advertising has met its purpose. The publisher relies on the conversion rate of the advertiser’s website, something which the publisher cannot control. CPA model can be used for display campaign, search campaign and also effective for affiliate marketing.

Do not get both metrics confused. as there is a strong distinction between the two. In eCommerce, cost per action is typically the amount you pay to convert a customer – i.e to make a sale – but this relates to both new and returning customers. CAC is all about acquiring new customers.

The importance of CAC in Digital Marketing & eCommerce

Now that we know what CAC is why is it important? How is this going to make you or your company more money?

The cost of customer acquisition is one of the MOST important metrics for any eCommerce store, along with the lifetime value of a customer. Why? Because your store needs to make money. Which means you need to get a return on investment (ROI) from your marketing and sales campaigns.

The important ratio to focus on, then, is one that tells you exactly how much value you’re making from your customers in relation to how much it cost me to acquire them:

The CAC metric is important to two parties: companies and investors. The first party includes

Companies and Investors. The first party includes outside early stage investors who use it to analyze the scalability of new Internet technology companies. They can determine a company’s profitability by looking at the difference between how much money can be extracted from customers and the costs of extracting it.

The other party interested in the metric is marketing specialist. They use it to optimize the return on their advertising investments. In other words, if the costs to extract money from customers can be reduced, the company’s profit margin improves and it makes a larger profit.

Then, investors are more interested in providing the company with the resources it needs, partners are more committed to growth, and the company can use the improved profit margins to pass the value to its customers for a greater market position.

As well as the above you need CAC to assess how your marketing campaigns are performing. The goal is to find the marketing channels that have both a high Lifetime conversion LTV:CAC ratio and are scalable. There is no use only focusing all your time on channels that send only a very small amount of customers. Find the right balance between time/effort, LTV:CAC and quantity of customers acquired.

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