What is customer acquisition cost? It is the cost of attracting prospective customers, plus the cost of the sales effort exerted to guide them toward making a purchase and becoming a customer.
It is important for businesses to know whether their marketing and sales efforts are profitable. They can discover whether they are by comparing their customer acquisition cost (CAC) to customer lifetime value (CLV).
A Formula to Calculate the Cost of Customer Acquisition
Your customer acquisition cost formula is relatively straightforward.
- Choose a representative time period (usually a year).
- Calculate your total marketing cost for the period.
- Divide it by the number of new customers you gained.
Finding the right figures to use may require a bit more thought and analysis. For example, maintaining a website is a marketing cost, but if your existing customers use your website to access your company, then at least part of that is not an acquisition cost. In that case, a portion of your website-related costs should be used in your CLV calculation.
Similarly, some of your marketing investment targets existing customers, and the rest is used to attract new customers. To get an accurate picture that reflects realities, you cannot use your total marketing cost to calculate your customer acquisition cost. Instead, you must divide your marketing costs between customer acquisition and customer lifetime value figures.
Costs Associated With Customer Acquisition and Customer Retention
“Marketing costs” sounds like a straightforward figure, but it consists of many business expenses you may not allocate under marketing costs in your business accounts. For example, the true costs of marketing and customer retention include:
- Advertising, social media, and website-related costs.
- Sales and marketing salaries and contractor costs.
- Sponsorships and subscriptions you use for brand exposure.
- Equipment costs (e.g. phones and other devices).
- Sales and marketing tools, for example, your CRM and marketing automation tools.
- The cost of office space and a share of overheads, such as electricity and other utilities.
- Other costs, for example, sales rep travel costs, trade show attendance, etc.
The percentage of each of these costs that should be allocated to customer acquisition cost and customer lifetime value will also not reflect in your business’s accounts. You may need to analyse your data to effectively identify where your resources are used.
The alternative would be to allocate all sales and marketing costs under customer acquisition costs (as some sources recommend), resulting in a skewed ratio and unrealistically high customer acquisition costs.
How to Boost Customer Acquisition Profits
The simplest and least effective way to decrease customer acquisition costs is to slash sales and marketing budgets. This is unlikely to be sustainable or profitable. Every business needs new customers to grow and compensate for customer attrition. Adopt a measured approach. For example, you could:
- Analyse how different forms of marketing promote sales. Attribution can be complex, and factors such as seasonality may need to be factored in. You may need to test your conclusions, but your aim is to determine which types of marketing campaigns attract the most customers at the lowest cost and strategise accordingly.
- Optimise your sales funnel. Find out what strategies are most effective in moving customers from one stage to another. Eliminate elements that do not add value, and target your investment to achieve higher conversion rates.
- Improve the overall customer experience. Are you losing prospective customers because your website is confusing or customer service is hard to reach? Search for pain points like these and eliminate them. More conversions decrease customer acquisition costs even if you do not spend any less on sales and marketing.
- Target your ideal customers. Trying to sell to everyone? Consider profiling your ideal customers so that you can target their needs more effectively and improve your marketing ROI.
- Work on customer retention and repeat purchases. If you can improve customer lifetime value, you automatically make your sales and marketing investment more profitable. It’s accepted knowledge that it’s cheaper to keep a customer than to find a new one.
Once you begin analysing your spend and optimising where it goes, you should start seeing results. Remember, you don’t necessarily need to spend less, but you do want to see increased profits. That means focussing your resources where they’ll achieve the best results for your business.
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