A key business metric that many retailers use to identify their success in attracting new buyers to their store—and how much it costs them to do so—is customer acquisition cost (CAC).
If you've heard this term used before, but aren't really sure what it is, or how to calculate it for your company, this article is for you.
We'll go over what CAC is, how to calculate it, and most importantly, how to lower it to make the most of your sales and marketing budget at your retail store.
What is customer acquisition cost?
Customer acquisition cost, or CAC, refers to the dollar amount—including the total sales expenses, advertising costs, and marketing spend—a business pays in order to gain a new customer over a period of time.
Components of CAC include the costs associated with:
- Hiring and paying your sales team
- Implementing marketing campaigns
- Any advertising tools or software
How is customer acquisition cost calculated?
The cost of customer acquisition is determined through a simple calculation.
Here is the customer acquisition cost formula:
CAC = (the dollar amount spent on sales and marketing efforts) / (the number of new customers gained over a time period)
Customer acquisition cost example
Now that you know the basic formula, let's put it into practice.
Let's say you're the owner of a luxury accessories store. You want to determine the cost of acquisition over the past holiday season. During the fourth quarter of the year you invested $15,000 toward marketing and sales expenses and acquired 250 new buyers.
Plugging those numbers into our calculation of customer acquisition, we get $60 per customer.
So is that any good? It depends on your industry, how much your average shopper spends, and how long your average customer lifetime value (CLV) is.
In this example with a luxury accessories store, you're likely to have a high-spending customer base that will spend far more than $60 a visit. So in this case, a $60 average customer acquisition cost is quite good.
Your main goal is to ensure that your CAC is lower than your CLV. A general rule of thumb is the have a 3:1 ratio between the two.
What is the difference between CAC and CPA?
Another acronym you'll see tossed around is CPA, or cost per acquisition. This is a very similar business metric to CAC with just one slight difference.
While CAC refers to the cost to acquire a paying customer, CPA refers to the cost to acquire a lead. So if someone signs up for a free trial, fills out a form on a website, or registers for a webinar.
You don't see cost per acquisition used as often in the retail industry largely because actual customers who come into your store to buy something are tracked more closely, for obvious reasons.
However, it can be valuable for retailers to track CPA along with CAC to see how many potential customers are visiting your website, engaging with your advertising campaigns, or taking other actions aside from actually dropping by your physical store to make a purchase.
How retailers can lower customer acquisition costs
If you're looking to adjust your customer acquisition strategy so you can lower your CAC costs, we've got some tips to help you make that happen.
Make sure you're reaching your target customer
First off, you want to make sure you know who your ideal buyer is and ensure you're focusing your sales and marketing strategy on them. That means getting on the marketing channels they're on, matching messaging with issues and problems they care about, and meeting their expectations for how brands should behave.
For example, if you're a luxury brand trying to target Gen Z consumers, focusing your marketing spending on social media channels like Instagram and TikTok will help you target that audience best.
It's all about making sure your marketing expenses are being put toward the right channels so you can make the most of your budget and reach the right people.
Redouble your customer retention efforts
Next, remember that while acquiring new shoppers can be costly, retaining your existing ones is far less expensive. Depending on your industry, studies suggest that acquiring a first-time customer can cost between 5 and 25 times as much as retaining an existing one.
So if you already have a loyal customer base, you may be better off working to earn more repeat business than trying to get new faces in the door. After all, return buyers spend up to 67% more than one-time customers.
Don't be afraid to try new things
Finally, don't be afraid to implement new strategies if what you're doing now isn't working out in the way you'd hoped. Whether it's reallocating your marketing expenses, investing in new advertising tools, or switching up your sales process, experiment with what you're doing to see what works best for you and resonates with your audience the most.
You may even find that different customer segments respond differently to different marketing tactics, so get creative and play around. While a direct mail piece might work for an older audience, Instagram marketing may serve your younger shoppers better.
How Clientbook can help
Lowering CAC while lengthening customer lifetime value is the ultimate goal for any business owner. But it doesn't happen without investing in the right tools to make it happen. Clientbook is a tool over a thousand retailers use nation-wide to better connect with their clients and stretch their additional budget.
Clientbook, a mobile app and web platform, is a tool built specifically for retailers to help you better manage your clients, automate client follow ups, and engage with your clients when they aren't in your store.
Whether you want to build a client profile, create a custom wish list of products you know your client will like best, track a client's purchase history, or simply text a client to follow up with them on a recent purchase, you can do it all with Clientbook.
If you're ready to see how Clientbook can help you reach new customers and better retain the ones you have, take a free tour of our software today.
Earning new business and gaining trust with a new audience is never easy and often takes smart marketing tactics and business strategies to make the most of your budget. If you're having trouble connecting with the right people, or are simply looking for new ways to stretch your dollar, following the tips in this article will point you in the right direction.
Better yet, investing in a tool like Clientbook will help you accelerate the process and make it easy for both you and your sales team to build lasting relationships with your clients and earn repeat business.
Schedule a demo today to see the difference Clientbook can make for your retail business.