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What Is the Customer Acquisition Cost and How to Calculate It?
In any business there are many important metrics, but Customer Acquisition Cost (or CAC) is the most important of them.
I say this from a premise:
For there to be business, you need sales, and for there to be sales, you need a funnel to provide you with customers.
There is not much more to it than that. I'll bet you a cup of coffee that you can't find an exception to this rule.
There may be some nuance, but if a business works, it's because there are customers. After all, someone has to pay for the party.
And that's precisely why the CAC is such an important metric.
What is the Cost per Client Acquisition?
The Cost per Customer Acquisition (or CAC) is the metric that determines how much it costs a company to get a new customer.
This metric is so important for most businesses because it helps define which of these 3 scenarios you are in:
- You are managing your marketing budget well.
- You are managing your marketing budget sub-optimally.
- You are managing your marketing budget poorly and you are heading for bankruptcy.
Those being the three possibilities, I suspect that right now you want to know how to calculate it for your company, right?
How to calculate the cost of customer acquisition?
To calculate the CAC you have to aggregate all your expenses in activities related to customer acquisition for a given period (almost always a month) by the number of customers you have gained in the same period.
What are the most common mistakes when calculating the CAC?
The only thing worse than making marketing or business decisions without knowing your CAC is taking them into account a wrong CAC.
And there are 2 super recurrent failures that lead people to miscalculate the Customer Acquisition Cost:
- Not accounting properly for expenses.
- Not accounting for customers properly.
Not accounting for all expenses used in customer acquisition.
To determine the numerator of the CAC equation you have to add all your marketing expenses, but also the salaries of the people dedicated to this area.
In addition you have to add a percentage of the salaries of employees who, although not dedicated to this area full time, have invested time and all the expenses of equipment, tools and supplies used by these people.
Not counting properly the clients for a period.
The other common mistake is to relate the expenses of a certain month to the clients obtained in that same month without asking any more questions.
This way of doing it will be valid for most businesses, but it might not be valid for yours.
For an online shop, surely all the new customers you get in this month are due to your promotional actions in the same month, but would it be the same for a real estate agency?
Almost certainly not, since their customers go through a period of several months from the moment they start a process of buying or selling through a real estate agency until they definitely buy or sell something.
If I am already calculating the cost of acquiring clients correctly, how do I know if it is good or bad?
As with most good or bad questions in the area of marketing the answer depends.
- It depends on your financial strenght.
- It depends on how long it takes you to charge your customers.
- It depends on the type of business you are in.
- But most of all, it depends on the Lifetime Value of your customers.
If you want to know more about this metric you can find out everything in the link above, but a good starting recommendation is that your Acquisition Cost is at least 3 times less than the income you get from each customer.
How to improve your customer acquisition cost?
Any measure aimed at getting you more clients for the same price, many more clients for just a little more price or fewer clients for much less price would improve your CAC.
That means that laying off your entire sales team in the middle of the month will probably improve your CAB significantly that month... and the next you will have to close down the company.
So, although there are many measures you could take to improve your CAC, I'm going to focus on my two favourites:
Trying out new marketing channels.
Nowadays, if we add the online and physical recruitment channels that a business can use, we will probably get together with several hundreds.
Despite this, most businesses only employ 2 or 3.
If this is your case, trying and measuring new channels can help you a lot to reduce your CAC.
Optimise channels you already work with.
This is the best way for any business to improve its CAC. Also yours.
The only requirement for doing so effectively is data: to implement changes aimed at improving something you must be able to measure the evolution and have a history to compare it with.
Fortunately, technology can help you with this, and with the help of a CRM it will not be too difficult to collect the data you need.
If you don't already use a CRM, the best one to try is efficy.
And you can try it out right now.