Customer acquisition cost refers to the cost incurred by an organization while convincing a customer to buy a service or a product. It is the cost of resources for the business in order to acquire a new customer. This involves research, marketing, and advertising costs. CAC (customer acquisition cost) helps organizations to determine the number of resources that can be profitably spent on a specific customer.
Customer acquisition cost is moreover known as the acquisition cost. It additionally includes every single effort necessary to introduce your products and services to potential customers to convince them to buy and become active customers. Always remember that if you want a profit, your customer acquisition cost should be less than the overall value of the customer in the entire customer life-cycle.
Why Is It Important?
There are a lot of benefits associated with the business metrics of customer acquisition cost but the most enormous benefits it gives is that it helps measure, plan and strategize future capital allocations. It also helps businesses to understand the worth of the customer to the company. Customer acquisition cost is also important in calculating the value of the customer to the company and return on investment of acquisition. Knowing the CAC can support organizations to strategize resource allocation in order to acquire a new customer. It moreover provides a more realistic picture of the costs incurred on the company’s financial statements.
The customer acquisition cost is commonly expressed as a ratio between the sum total of customer acquisition cost and the number of new customers acquired by the company as part of the customer acquisition strategy. It also increases along with the business or organization. But when the diminishing return on customer acquisition starts, the company must adopt different strategies. Most companies frequently use the latest technology and innovations for customer acquisition. But it is always significant to minimize the cost and this metrics needs analysis in searching for the most cost-effective strategy in gaining new customers.
How to Measure Your Customer Acquisition Cost?
Determining your customer acquisition cost is not just that simple but it’s not so complicated either. All you need to do is to determine all the costs that are part of acquiring new customers and the customers gained. Below is the formula on how to calculate the CAC:
CAC = Total Acquisition Spend ÷ Number of New Customers
The total acquisition spends will depend on some different factors related to your particular business such as:
- Total marketing spends – this is the campaign budget, plus the cost of content and graphics, marketing tools, etc.
- Total sales costs – it refers to sales or affiliate commissions, strategic partnerships, etc.
- Total support costs – it pertains to customer service, tech support, etc.
- Total overhead expenses – this is the office or warehouse space, equipment, online servers, etc.
- This also includes the salaries of involving during the customer acquisition phase.
There are also two more crucial factors to consider:
- Length of your sales cycle – a series of predictable phases that are required to sell your company’s product or service. Sales cycles can vary greatly among organizations, products, and services, and no two sales process will be exactly the same
- Identifying how frequent customers make purchases – Purchase Frequency is a metric that calculates the average number of times a customer makes a purchase within a set time frame. This provides you with insight on how to structure your marketing to best suit the buying behavior of your audience. While knowing the number of purchases is useful, it is also important to use that number to calculate the time between purchases.
Determine Your CLV (Customer Lifetime Value)
Customer lifetime value is the total amount of revenue your customer will generate for you throughout their lifetime.
After calculating the customer acquisition cost, you’ll need to know how much a customer is worth to your business over their lifetime. This will give you a better understanding if your acquisition costs are on the right track. Your CAC should not be higher than your CLV because this means you are spending more money than you are earning.
So, here are the metrics you’ll need to calculate your CLV and the formulas:
- Average Order Value (AOV) = Total Revenue ÷ Numbers of Orders
- Purchase Frequency = Numbers of Orders ÷Unique Customers
- Customer Value (CV) = AOV × F
- Customer’s Average Lifespan = 1 ÷ Churn Rate Percentage
Get all those values and put them into the CLV formula:
CLV= CV x Customer’s Average Lifespan
These metrics help you to make a realistic expectation in acquiring customers. You can test different approaches and once you have proven the most effective strategy, move on to allocating more funds thereon.
The customer acquisition cost is the best technique required to develop your product differently and if you’re planning your next business, you can’t afford to neglect this fact. This will grow your business faster. Learn more by taking a look at the free demo of the services we are offering.