7 minute read
Customer Acquisition Cost is THE Main Metric In Determining The Success Of Your Company
Customer Acquisition Cost: example, calculation, result, and how to improve it all here and simplified for you.
Traditionally, a company had to intrigue viewers with an abrupt style of advertising, and from there they would find methods to track consumers through the decision-making process.
Today, many web-based companies can engage in highly targeted campaigns and track consumers as they progress from interested leads to long-lasting loyal customers. In this environment, the customer acquisition cost (CAC) metric is used companies and investors.
The CAC, as you probably know, is the cost of convincing a potential customer to buy a product or service. You want to increase your customer base and maximize your earning potential, right? So in this article, we will provide examples and highlight these areas to help you in doing so:
- We will discuss the Customer Acquisition Cost metric in more detail with examples
- How you can measure the CAC of your company
- What steps you can take to improve your CAC result
What The CAC Metric Means To You
Businesses and investors work with both inside and outside parties. The outside parties are early stage investors who use it to analyze the scalability of new companies. They can figure a company’s profits by looking at the difference between how much money can be obtained from customers, and the costs of obtaining that client.
For example, take an oil marketing company, if an oil supply is in an area requiring heavy infrastructure investments, the amount applied to extract the oil may be more than its market price per barrel.
The inside party refers to the internal operations or marketing specialist. They use optimization on the return of their advertising investments. In other words, if the costs to extract money from customers can be reduced, the company’s profit margin improves and it makes a larger profit.
The investors are more interested in providing the company with the resources it needs, the partners are more committed to growth, and the company can use the improved profit margins to pass the value to its customers for a greater market position.
How You Can Measure Customer Acquisition Cost
Overall, the Customer Acquisition Cost can be calculated by dividing all the costs spent on acquiring more customers (marketing & sales expenses) by the number of customers acquired in a certain period.
For example, if a company spent $100 on marketing in a month, plus another $100 on the sales team in that month, and acquires 10 new customers during this period, their CAC is $20 ($200 spent / 10 customers = $20 cost to gain one customer).
Keep in mind, there are situations that may become factors in determining the CAC. For instance, a company may have made investments on marketing in a new region or early stage SEO that it does not expect to see results from until a later period. While these instances are rare, it may affect the calculations when determining the CAC.
While suggestions say to account for multiple variations in a situation, we will provide some examples of calculating the CAC metric in its most practical and theoretical forms of two leading examples. Example 1 below shows a poor metric, while Example 2 shows a good customer acquisition cost.
Customer Acquisition Cost Example 1: An eCommerce Company
We take a fictitious online company that sells consumer food products. The company had spent $200,000 on advertising last month, and its marketing team says that within that time 20,000 new orders were placed. This suggests a CAC of $20. This number will not be significant.
However, if a car dealer has a CAC of $20, the management team will be thrilled when looking at the year’s financial statements.
For this ecommerce company, the average order placed by customers is $25, and it has a markup of 100% on all products. This means that this company on average profits $12.50 per sale and generates $2.50 from each customer which will be used to pay for salaries, web hosting, office space, and other general expenses.
While this is a rough calculation, what would happen if customers make more than one purchase over their lifetime? What if they would completely stop shopping from your competitors and only bought from this company from now on?
The purpose of customer lifetime value (CLV) is specifically designed to resolve this. You can use this free CLV calculator online or scroll down this page to see our calculation examples and the formula needed. Generally, this metric helps you with a more accurate understanding of what the customer acquisition cost means to your company.
A customer acquisition cost of $10 may be quite low if customers make a $25 purchase every week for 20 years! However, this business is struggling to retain customers and most of the customers make only one purchase.
Customer Acquisition Cost Example 2: An Online Software Company (SaaS)
In this example, the company provides an online system for managing sales contacts for customer relationship managements. Since this is a cloud based system, the cost of distributing the software is lower and easier for customers to retain without the hassle they would experience having to upload all the contacts, tasks, and events they are tracking onto a new CRM software.
The company has worked up to the top of the search engines with the help of SEO services and they have an expert sales support team based out of rural call centers in the Midwest working for minimum wage. The company has many strategic partnerships that provide a steady supply of customers as well.
Here is a CAC calculation and how it looks:
- Total cost of new customer sales and support call centers: $1,000,000/year
- Total monthly spending on SEO services: $20,000/year
- Total cost paid to align partners with customer: $1/customer
- Total new customers generated in the year: 1,020,000
Customer acquisition cost: ($1,020,000 spent / 1,020,000 new customers) + $1 per customer = $2
From this customer acquisition cost example, the amount is worth only the money retained from customers. This company has used a calculation to determine customer retention and its customer lifetime value (CLV) is $2,000. That means this specific business is able to turn a $2 investment into $2K of revenue per customer! This is attracting to investors, and is also a signal to the marketing & sales team that an effective system is in place.
What About CAC Per Marketing Channel?
By knowing which channels have the lowest CAC, the more you can allocate your marketing budget into those lower customer acquisition cost channels, and the more customers you can obtain for the same fixed budget.
A simple way to do this is, gather all your marketing receipts and spreadsheets for the quarter, month, or year (whichever you prefer), and add those up per channel. The larger the time frame you’re measuring, the more accurate the result will be.
For this customer acquisition cost example, we need to categorize each channel you’re marketing in. Such as how much you spent on Google and Facebook advertising? This total will be placed into the “Pay-per-Clicks” column. How much did you spend on SEO and blogging? This will go into the “Inbound Marketing” column. And so on.
Results will give you the cost invested and made per channel, giving you a better idea of where to reallocate your budget for a more effective marketing strategy.
Google Analytics (free) and Hubspot (paid) are great tools that aid in tracking “paying customers” back to the last channel that customer had visited before making their sale with your business. This lets you know which channel is responsible for that customer coming to you and which assisted in the sale.
These methods are a good theological way of tracking customer acquisition cost calculations. Also keep in mind the offline marketing channels that helped attract new customers such as branding campaigns, TV commercials, direct mail, billboard ads, etc. These offline campaigns are difficult to track, though promo codes & call tracking numbers will help. So make sure you’re using these categorized channels methods above to better track your company’s investment.
How You Can Improve Your Customer Acquisition Cost
Advertising campaigns can always be more effective, customer loyalty can always be improved, and there can always be more revenue coming in from the consumers.
Here are some methods for improving your results:
- Improve landing page conversion metrics: Improve this by creating better content, having a precise call-to-action (CTA), speeding up your page load speed, removing your navigation menu, and making your website look great on all devices and in all browsers.
- Enhance user value: Educating your customers about a new product or news topic that customers have showed interest in and the benefits it can bring to them.
- Implement customer relationship management (CRM): Using techniques to gain customer loyalty and re-marketing current customers, such as automated emails, consistent blogging, incentive programs and of course tracking these results.
Customer Lifetime Value (CLV)
What is Customer Lifetime Value anyways? CLV is the projected amount of revenue a customer will generate over their lifetime at your business.
Here is the formula and how it works. This example’s time frame is monthly.
- The average spend per month of a customer: $100/month
- The percent of monthly customers who don’t come back or churn rate: 10%
Customer Lifetime Value: $100 average spend / 10% churn rate = $1,000
Using the CLV formula gives you:
- Average your variables
- Calculate the Lifetime Value (LTV)
- Rate customer satisfaction
So What Does This All Mean?
In using these tracking methods and properly calculating these important metrics, you will get better results, be able to leverage your company, understand how your company does as a whole, know which areas work best and which need improvements, and gain your customer’s loyalty.
If you enjoyed this blog article and want to learn more, please download our {cheat sheet} below. Or you can read up on our blog about the 6 Most Important Marketing Metrics Made Easy or learn about the 12 Digital Marketing Metric Your Boss Doesn’t Care About. If you need help figuring out your business’s metrics, give us a ring at 773-680-6952. We are located in Bartlett, Roselle, Brookfield, Carol Stream, Geneva, and Chicago so you’re never too far away for a sit down meeting with a marketing team that wants to grow with you.
