How to calculate your customer acquisition cost
Customer acquisition cost (CAC) is an important metric to track. It is valuable for measuring the effectiveness of your customer acquisition strategy and adjusting it over time. It is also a meaningful metric for potential investors, allowing them to gauge the scalability of your business.
How to calculate customer acquisition cost
There are a couple of methods to calculate CAC. A basic formula may be used to evaluate a specific campaign or strategy used to bring new customers to your business. Simply divide all the associated marketing costs (MC) and sales costs (SC) by the number of customers acquired (CA) to generate the customer acquisition cost (CAC).
CAC = (MC + SC) / CA
It’s important to also keep in mind the customer lifetime value (CLV). This takes into consideration whether your product is a one-time purchase, a purchase every 20 years or, perhaps, it’s a weekly purchase. This provides additional perspective when evaluating the CAC.
You should also consider the CAC and how it impacts your profit margins. If the CAC is too high, in relation to the cost of the product, its mark-up and other costs, you could potentially end up losing money. So, what is a good CAC for one company will not necessarily work for another.
Depending on the particular type of business, you may choose to consider some of the following costs when calculating CAC:
- Total cost of new customer sales support call centers (CC)
- Total cost paid to strategic partners per customer (SP)
- Total amount spent monthly on search engine optimisation (SEO)
- Total new customers generated in a year (NC)
In this case, the formula would look like this:
CAC = ((CC+ SEO)/NC) + SP
How to improve your customer acquisition costs
As mentioned above, it’s important to monitor your CAC to ensure your company remains profitable and that you’re gaining the best results from your efforts. Businesses are always looking for ways to contain costs while still meeting your company goals. Here are a few ways to improve your customer acquisition costs while boosting results.
- Increased website conversions. You want to be sure you’re getting the most from your site as possible since you don’t want to lose sales due to site weaknesses. Make sure your calls-to-action are effective, that your site is mobile responsive, landing pages are optimised and the messaging on your site is clear and easy to understand.
- Raise customer value. This is the act of making your product conceptually more valuable to your customers. This may be achieved by adding enhancements or features to your product in which customers have expressed an interest. Offering a new product or adding upgrade options is another approach. These tactics may make your product more appealing, resulting in increased new customer acquisitions. They may also carry minimal development cost and still increase average order size. Plus, this approach often aids in both customer acquisition and retention while increasing referrals.
- Implement customer relationship management (CRM). A platform of this type will increase process efficiencies and customer satisfaction, while facilitating the more seamless buying experience desired by today’s consumers. It makes it easier to automate marketing processes, track customer interactions with your company and more.
- Periodically adjust and update your strategy. When you’ve taken the time to create an acquisition strategy you’ll want to re-evaluate it based on cost and effectiveness.
As you can see, it’s important to calculate and monitor your customer acquisition costs. It makes it easier to measure the effectiveness of your overall strategy, evaluate various acquisition methods and ensure long-term profitability. Plus, doing so makes it possible to determine the impact of each strategy on your total CAC, your profitability and your bottom line.
Learn more about Customer Acquisition:
- What is customer acquisition?
- A guide to your customer acquisition strategy
- How to create a customer acquisition funnel template
- Why all businesses should calculate customer acquisition costs
- Customer lifetime value calculation: a key business growth metric
- What is the LTV:CAC ratio and how can you calculate it?
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