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You’d agree that every business is primarily designed to cater to the needs of the customers. Therefore, customers are a vital piece of the distribution chain. Customers make the cycle complete — and it’s what makes everything tick. It’s no news that building a profitable business involves having a regular inflow of customers. But how much does it take to acquire new customers? Well, that’s what customer acquisition is all about.
In this guide, you’d get to understand the nitty-gritty of customer acquisition, and also get a clear blueprint on what it will take to acquire new customers for your business.
Converting leads into customers requires costs — and the Customer Acquisition Cost (CAC) measures such costs. It’s the total marketing cost and sales needed to acquire a new customer over a specific time frame. As a business owner, you get to use this metric to measure your profitability in the marketplace.
The Customer Acquisition Cost (CAC) compares the total amount spent on attracting new customers to the number of customers gained throughout the process. If the CAC is decreasing, it translates to better efficiency as less money is spent on acquiring new customers. And that will, in turn, lead to more returns.
Having a good grasp of the purchasing power of your potential customers, and what they’re willing to pay for your product or service offering is good. But that doesn’t give you more insight into the health of your business.
To have a more robust understanding of your business health, you have to put into consideration the cost of acquiring new customers. For instance, if you’re managing a software company, you can have a good grasp of your company’s profitability by taking a close look at your lead conversion rate, an inflow of new customers, and the sales cycle. But if you want to scale your business, you have to take a look at the CAC.
If the cost of acquiring new customers is small, then you’d have a strong revenue model. And that’s good for raising more capital for the business. Having a good understanding of your CAC is good. But you should know the correlation between customer cost acquisition and the lifetime value of your loyal paying customers.
The relationship between the customer lifetime value (CLV) and the CAC shows your business health. If there are strong profit margins and finances, then you’d have a high CLV-to-CAC ratio, and that makes your business better suited to adapt to changing conditions in the marketplace.
On the flip side, a low CLV-to-CAC ratio shows issues in your pricing, inefficient operations, or internal bloat. To a large extent, it shows you can’t be more aggressive with more product or service pricing. A low ratio also indicates future cash flow issues, and that may pose a threat to the finances of your business. And if the ratio is negative, then a thorough financial overhaul is imminent.
Customer acquisition cost shows the total cost used in acquiring new customers. It includes things like the employee’s (or marketer’s) salary, advertising costs, costs of the salespeople, and other expenses made during the acquisition of a new customer. These costs are divided by the total number of customers acquired. And that makes up for the Customer Acquisition Cost (CAC).
Mathematically, Customer Acquisition Cost (CAC) can be represented as:
Where:
The CAC metrics help you calibrate your business investment so you can ascertain if you’re on track and making the right decisions.
Customer acquisition cost involves the sales and marketing expenses made before acquiring a new customer. These expenses could be:
There are cases where there is an additional cost incurred during the process. These costs have to be included in the customer acquisition cost. Omitting any of the expenses incurred in the sales and marketing unit will lead to an artificially favorable customer acquisition cost.
Let’s say a software company spends $20,000 on its marketing campaign. At the end of the campaign, they had about 3,000 new subscribers.
At the beginning of each New Year, the company is projected to spend an additional $40,000 on the technical and production cost of these new subscribers.
CAC = ($40,000 + $20,000) ÷ 3,000 = $60,000 ÷ 3,000 = $20.
Therefore, the software company spends around $20 to acquire new customers.
Let’s say a grocery company spends $6,000 on sales and around $2,000 on marketing to attract 2,000 new customers. The CAC will be:
CAC = ($6,000 + $2,000) ÷ 2,000 = $8,000 ÷ 2,000 = $4.
If a manufacturing company spends about $20,000 on marketing, and around $2,000 on sales but acquires about 500 new customers, the CAC will be:
CAC = ($20,000 + $2,000) ÷ 500 = $22,000 ÷ 500 = $44.
Let’s say a real estate company spends around $30,000 on marketing and $5,000 on sales. After the duration of the campaign, the company acquires 100 new customers. The CAC of the real estate company will be:
CAC = ($30,000 + $5,000) ÷ 100 = $35,000 ÷ 100 = $350.
Let’s say you’re a digital marketer who’s looking to attract more customers using Google Ads. The process could be tedious especially if you’re running multiple campaigns from a single account. To keep a close eye on your campaigns, you’d need a tool like the PPC Signal tool.
For instance, if you’re running an online campaign, and you’re looking to optimize the cost per conversion of your campaign. All you need to do is to navigate to the PPC Signal dashboard and choose the cost per conversion metrics. After that, an automated signal will be displayed in the middle of your screen. The automated signal is fed with real-time data from your campaign.
From the signal displayed, you get to gain insight into your campaign, and also get to know more about outliers, trends, anomalies, and shifts found in the data. To gain more insight into the campaign, you have to click on the Explore button.
After clicking on the Explore button, a graphical representation of your campaign will be displayed on the screen. The graph will show you how your campaign has been performing over time.
There is also the option of representing your data in a tabular form. With the tabular representation of your data, you get to easily monitor other metrics that affect your campaign.
The automated signal report will help you make more informed decisions. This way, you get to take actions that will help you lower your cost per conversion and possibly record better results for your campaign. With the PPC Signal tool, you get to reduce the time it takes to manage your campaign — and there will be no need for hiring external hands to manage the campaign. Furthermore, the tool helps you use your resources wisely. This way, you get to generate more returns for your investment.
Businesses always benchmark their customer acquisition cost against the customer’s lifetime value. A CAC: LTV ratio of 1:3 is typically seen as a good ratio. But the figures typically vary from business to business.
Customer acquisition cost helps in identifying how costly (or profitable) your company’s growth is. If the CAC to LTV ratio is high, then your company growth won’t be sustainable. Why? Because the cost of acquiring new customers will be higher than the profit generated from each new customer.
CAC shows how much a company spends on acquiring new customers. It includes the total cost of marketing and sales effort plus the equipment or property needed to compel a customer into buying your product or service offering.
To calculate the CAC, you have to consider the cost of sales and marketing divided by the total number of new customers acquired.
Having an understanding of what it takes to bring in new customers will help you make better business decisions and also predict the profitability of your business in the long run. As a business owner, you need to take some time to figure out what your customer acquisition cost is. This way, you get to know the amount of money that goes into acquiring a new customer.
Furthermore, if you’re managing online campaigns, then you need a reliable way to measure your result — and that’s where the PPC Signal tool comes in. With the PPC Signal tool, you can easily identify the patterns in your campaigns, and pretty much come up with ways of handling any issues.
Now you know all there is to know about the customer acquisition cost, how much does it take to acquire a customer in your business?
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