What is CAC? How to improve and optimize the CAC index

CAC is one of the most important metrics for business operations that every business owner needs to understand. In this article, we will clarify what CAC is and the factors that help business owners optimize this critical metric.

1. What is CAC (Customer Acquisition Cost)?

CAC refers to the cost of acquiring a customer. It includes all the expenses related to persuading consumers to purchase a business’s products or services. This encompasses research, marketing, and advertising costs.

CAC includes all the total sales and marketing expenses such as:

• Equipment used in sales such as computers, phones, printers, etc.

• Software technologies like sales management software

• Salaries of sales staff and marketing employees

• Consulting costs, using marketing channels, and advertising

• Costs for online and outdoor advertising activities

• Discounts and rebates

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2. The Role of CAC in Business Operations

For business operations, revenue and profits generated from customers are the key factors determining the survival of a company. It can be said that CAC, or the cost of acquiring customers, is a metric that reflects a business’s future success by evaluating the profit gained from each investment.

• Optimizing payback time: Payback time refers to the period required to recover the investment used to acquire customers. In practice, a business needs to recover this invested amount before starting a new cycle to attract more customers. CAC helps businesses determine how much revenue is needed from each customer to break even and ensure profitability.

• Optimizing decision-making: For some businesses, CAC is also evaluated based on the effectiveness of advertisements. This means that by measuring the cost per click on ads or the cost to acquire a customer, a business can assess whether the ad campaign is effective, whether it needs optimization, and whether the campaign should continue.

Overall, CAC plays a crucial role in measuring and assessing the health of a business, as well as the effectiveness of marketing campaigns.

3. How to Calculate CAC?

The CAC formula is calculated as follows:

CAC = Total sales and marketing costs / Number of customers acquired

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The values used should be in the same reporting time period.

Example: If a business spends 150 million VND on sales and marketing in a month and acquires 1,000 customers, the cost to acquire one customer would be 150,000 VND.

CAC includes the following factors:

• Marketing and advertising expenses

This factor reflects the amount spent on advertising such as Google Ads, Facebook Ads, newspapers, etc. Most businesses invest in ads to attract customers to their products and services.

• Technology and tools

Technology here refers to the devices, software, and applications used by your business’s sales and marketing team.

• Production costs

Usually, these costs are determined by materials used for creating content, TV commercials, or media appearances to expand the brand’s reach. Additionally, creative costs such as packaging, sound, etc., for producing advertising materials are also included in these expenses.

• Inventory costs

Inventory costs involve expenses related to risks like damage or maintenance of equipment. In some cases, these hidden costs may not be listed, but they are an essential factor for your business to consider.

4. How to Improve and Optimize CAC

• Invest More in Conversion Rate Optimization (CRO)

Strive to enhance the customer experience and product quality to convert potential customers into actual buyers, whether in-store or on your website.

Specifically, for online businesses, optimizing the website interface, shopping experience, and product browsing will be crucial in encouraging customers to stay longer on your website and increasing the click-to-purchase rate.

Moreover, the order completion system and online payment should be optimized to ensure convenience and immediately meet customer needs, minimizing the chances of order cancellations due to changing customer intentions.

• Increase Customer Value

Customer value refers to increasing the importance of customers by gathering their feedback. This allows you to clearly and accurately identify and evaluate any issues customers have with your products. You can then provide solutions to those problems, if reasonable, to ensure customer retention and encourage repeat purchases.

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• Focus on Loyalty Programs

Customer care programs or loyalty offers are considered one of the most effective marketing strategies. These initiatives help you not only enhance customer care but also increase revenue effectively.

In reality, returning customers are the primary source of revenue for your business, and the cost of converting orders from existing customers is much lower than from new customers.

For retail stores using software like Sapo Hub, business owners can easily segment customers and create appropriate promotional programs tailored to each customer, optimizing communication and minimizing costs. At the same time, they can accurately measure the conversion rate and effectiveness of each campaign.

• Don’t Rely Too Much on Paid Ads

Paid ads are essential for many business models. However, over-relying on them can create issues, such as being too passive in developing other sales channels.

Expand your communication channels and focus on organic resources like SEO for your website and social media. These channels allow you to reach more customers without the high costs or dependency on paid advertising, the results of which may not always be predictable.

These are the key factors regarding CAC (Customer Acquisition Cost) that business owners need to understand. We hope the insights shared above help you optimize costs and grow your business more effectively.

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