What Is Customer Acquisition Cost & How to calculate it?
Customer acquisition cost (CAC) is the amount of money a company spends to acquire a new customer. By determining the cost of customer acquisition, a business can determine if the customer acquisition efforts are worth it. By combining the costs associated with converting sights into customers (advertising, marketing, sales personnel, etc.) and sharing that amount by the number of customers acquired, CAC is measured.
The Small Business Administration recommends that companies making less than $5 million a year spend between 7% and 8% of their revenue on marketing. Alternatively, if $300,000 is the sales revenue for your company, around $22,500 should be spent on marketing. But how do you make sure that cash is fine spent? Customer acquisition cost (CAC) is an essential metric.
We will explore what CAC is, how to calculate it, how to use it in marketing, and how it relates to customer lifetime value.
What does customer acquisition cost?
A company’s customer acquisition cost, or CAC, explains how much it has to pay to acquire a fresh customer. Utilizing web analytics for data-driven decision-making has given CACs a boost in popularity. Measuring companies’ CAC allows them to determine if they’re getting their money’s worth when they invest in growing their clientele, whether they’re paying for banner ads or developing articles and graphics.
Marketing methods using the internet can target specific groups of customers on a granular level. This is a relatively new approach. In the past, companies cast a wide net with advertising, aiming their marketing content at a broad segment of potential customers. In the hope that these efforts would generate new business, they cast a wide net with advertising. Companies typically saw undersized returns on marketing investment due to this approach’s lack of specificity.
Nonetheless, modern campaigns combined with CAC metrics can pinpoint specific groups of people and show you how much it costs you to bring them on board and convert them to paying customers.
How is customer acquisition cost calculated?
To measure CAC, you add up all the costs associated with procuring new customers (the amount you’ve used on marketing and sales) and divide that figure by the number of customers you acquired. Usually, a specific period of time is taken into accounts, such as a year or a fiscal quarter.
When an organization spends $1,000 on marketing in a year and acquires 1,000 new customers, the CAC will be $1 since $1,000 divided by 1,000 equals $1 per customer.
In contrast, if the company brought in 500 new customers, their CAC would be twice as high, or $2, since they spent the same amount of money and brought in half as many.
The formula is fairly straightforward, but it takes into account a wide range of factors, including the price of multiple marketing strategies and the salaries of staff.
How client lifetime value influences customer acquisition cost
During each customer’s lifetime of purchasing from you, your company makes a certain amount of money from them (called customer lifetime value or LTV) at that buy klonopin online canada time.
The time and how much a person spends as a customer varies greatly among businesses and sectors, so you need to consider the factors that are unique to your business. Still, certain elements of customer lifetime value apply to nearly all organizations.
- Average customer life span: The length of time the individual remains a customer.
- Rate of customer retention: Ownership a customer has during their lifetime.
- Profit margin per customer: Based on a percentage, this may include CAC and other expenses like the cost of goods sold, production and marketing costs, and how much it costs to run the business. Profit margin per customer is measured by taking your net income per customer, which is what per customer spends minus the CAC. Cut that number by your income from the customer over their lifetime. Multiply that by 100 to obtain the percentage.
- You can calculate the average amount of money each customer spends over their lifetime as a customer by adding up what each customer pays over their lifetime and dividing it by the number of customers.
- Average gross margin per customer: Depending on the customer’s life expectancy, this can be calculated over a specific period of time, like one year. If you are calculating life spans through profit margin, you would divide each lifetime profit margin by 100, then multiply that figure by the amount spent by each customer.
How can you improve your customer acquisition cost?
If you want to lower your CAC, you should convert leads and prospects into paying customers, increase the value of what customers receive, and use a customer relationship management (CRM) platform to stay engaged with your audience.
- Improve lead conversion rate: After an item is added to a shopping cart, you can use Google Analytics to see how frequently customers abandon the cart. When your website visitors leave without clicking through to other pages, you can take a close look at how fast your web pages load and think of ways to make your landing pages more engaging. It is also important that you check how your site looks on mobile devices and how smoothly the checkout process works. By improving these experiences, you can increase conversion rates.
- Add value to your offering: Users perceive the value of your products and services differently, so adding features that similar companies have implemented may not have the desired effect. Using surveys or emails, it’s best to interact with customers to figure out what would best fit their needs. Additionally, you can examine statistics such as your customer retention rates and more subjective feedback from your reviews. If you notice a correlation, it could help to improve one.
- Use a CRM system: You can use a CRM platform to track new customers, their movements through the sales funnel, how much they spend, when and where they buy, and more. As well as managing email lists, you can use it to create campaigns, schedule campaigns, and send drip emails with interesting content to promote a product or campaign.