At lower than three, margins are squeezed, and the total headroom for the business may be questioned. In order to ensure that the website is positively contributing to the company’s bottom line it is recommended that you examine the cost of customer acquisition as a key performance … Hopefully, you can see that although nuance is required, CAC and LTV remain two of the most useful metrics businesses have. The Customer Acquisition Cost (CAC) is a metric used to determine the total average cost your company spends to acquire a new customer. Basic Customer Acquisition Cost Formula In theory, customer acquisition cost should be a simple calculation, but it can vary depending on your business model. If a visitor costs $3 on average, that's $3000 in marketing spend for 50 customers, which is a CAC of $60 per customer. However, at a 6% conversion rate, 60 people will become customers for every 1000 visitors. If you signed up for a 'starter' bank account as a teenager and signed a mortgage loan with the same bank as an adult 20 years later, you've seen this in action. Sales and Marketing Cost = Program and advertising spend + salaries + commissions and bonuses + overhead in an year. Customer acquisition cost is designed to measure and maintain the profitability of your acquisition teams. This is a particular problem for bricks and mortar businesses, who don't always know when a customer first walked in and how many times they'll subsequently visit (see the Starbucks example above). The formula is total sales and marketing spend over a specific period, divided by the number of new customers over that same period. This is done by dividing the total amount spent on customer acquisition by the total number of customers acquired, as shown in the equation below. Why is it important to know CAC? Now imagine the company spent $1000 on marketing and related expenses last month, and acquired five customers, making their CAC $200. Customer acquisition cost is the amount spent to acquire a new customer. Let’s take a look at how all this would play out for two different types of companies and how each would calculate their customer acquisition costs. Fail to understand it, and your business will sink. It should generally include things like: advertising costs, the salary of your marketers, the costs of your salespeople, etc., divided by the number of customers acquired. But for most businesses, people will buy more than once – either by visiting a store repeatedly or paying monthly on a credit card (as is the case for SaaS businesses). A look at some of the principles behind CAC, CLV, LTV and all those other acronyms... We can all agree that there are a lot of metrics to measure running ANY business. Customer acquisition cost is an important business metric used to evaluate the cost of acquiring a new customer. How to calculate Customer Acquisition Cost However, the best businesses combine increased retention with increased spend – steadily upselling over time, so that they grow more valuable to the company as they progress through their time as a customer. The customer acquisition cost (CAC or CoCA) means the price you pay to acquire a new customer. Whatever method you choose, you'll have to pay for it (yes... even the last one – it's a time cost!). Customer acquisition costs are costs incurred to introduce new customers to a company’s products in hopes of acquiring new business. You'll need to decide on how to treat repeat customers in your CAC calculations – we'd typically err on the side of caution and discount them altogether. In this fantastic PDF file, Kissmetrics and Avinash Kaushik have broken down the LTV calculation using Starbucks as an example. High CAC is an indicator of some issue in your business process. Secondly, there are a bunch of costs that traditional calculators and formulas leave out – we've tried to include some in the calculator, but we won't have thought of all of them. Acquisition Cost (Customers) = Total Acquisition Cost / Total … Throws light on the efficiency of your sales and marketing efforts. Improving CAC can be achieved by optimizing marketing spends, cutting down on wasteful channels, improving targeting, using more free or lower-cost distribution methods (e.g., viral content, partnerships or freemium offerings) or reducing the total hours-per-deal (to cut people costs). Let's imagine an auto dealership that sells ten cars a week, and never sees any repeat business. This can help a company decide how much it can spend against the value of an asset. 3. Keeps a tab on your sales and marketing spend because an increase in CAC indicates there is an underlying problem. LTV = 3 * CAC So, as a customer acquisition cost example, if a company’s CAC is $100, then as per the equation, its LTV should be $300. A customer acquisition costs is an amount that is spent to acquire new customers for the company and is calculated by dividing the cost of acquisition by total new customers at a particular set period. Teenagers are worth next to nothing as banking clients (as they have minimal deposits and no borrowing costs), but keeping that teenager around until they're ready to take out an $xxx,xxx loan with the bank is a smart move – which is why banks invest so much in stores like this to appeal to young adults: In case we haven't labored the point enough, CAC needs to be measured against LTV to be useful – put together, they form a magic ratio which is useful as an internal metric and also as an indicator to evaluate the health of a business. That’s why extending your CLV is essential to a healthy business model & overall business strategy…. Basic maths tells us that we can improve a business's metrics in two ways – reducing the cost of customer acquisition or improving the lifetime value of the customer. Each car costs $15,000, and the profit the dealer will make on the vehicle is $3,000 – giving her a gross profit of $30,000. Customer acquisition cost is designed to tell you how much you need to spend to acquire a single new customer. Suddenly, the CAC drops to $50, a 16% fall. Compare your metrics to other businesses of your size and type. The best rule of thumb is to be spending 33% or less of your average customer lifetime value. However, we'll cover this more in the next section... A common question when working with lifetime value is how to deal with customers that have been 'reactivated' by marketing. Gives an idea of the average total cost spent on acquiring a new customer. Event costs differ widely on a case by case basis, but you will typically want to factor in things like venue cost, payroll, audiovisual equipment, and headliner fees. Have you ever calculated ALL of the costs involved in attracting a new paying customer to your app or game… Increasing the 'life' of the customer (also known as customer retention) is one way to tackle lifetime value improvement – stop a customer from churning so soon, and they'll spend more over their lifetime. Add up these expenses to reach your total costs. Here is an Ebook on 7 vital metrics every startup founder should know – you need to read if you want to increase profitability, retention and overall ecommerce success. Cost of acquisition also includes the expenses occurred in attaining a sale or a customer. For most B2B SaaS businesses, the costs of acquiring a new customer are determined by two factors: The costs of generating a lead (usually determined by marketing expenses). HOW TO CALCULATE CUSTOMER ACQUISITION COST. And because the number of new customers attracted in the period, we can calculate the average customer acquisition cost as: Acquisition Costs (AC) = $5m / 1,000 = $5,000 (average per new customer… To build a viable business, your revenue from a customer MUST exceed the money that you spent to acquire that customer. Retailers tend to use advanced methods for calculating CAC because customer lifespans tend to be longer and the average spend tends to be shorter. How To Calculate Customer Acquisition Cost. 2.You will get to know about the performance standards of your company with Customer Acquisition Cost Calculator. Armed with these two figures (assuming the LTV doesn't change), we can infer that the profitability per customer is $1000. Unless you know for sure that x% of the readership has already visited the bakery, it's nearly impossible to do – so you'll need to guess. In this case we will include all the above costs – including staff costs – to determine that total acquisition costs are $5 million. Customer acquisition cost is the best approximation of the total cost of acquiring a new customer. Let's imagine a SaaS business which keeps its customers for 12 months, on average. You work for an e-commerce company that sells products to customers for $100 each. Spend $100 on PPC and $50 on mailed flyers and end up with two customers? If you want to understand how to do this for yourself (with more accuracy), read on. Your CAC is $75 ($150 / two customers). If you've got a product, you need to sell it. Divide your costs by the total number of new clients and there you have it – your customer acquisition cost. For example, let’s pretend that your company wants to establish the CAC for the last 6 months. So, the customer acquisition cost formula is as follows: For example if you spend £100 on sales and marketing for a product, and in return get 5 new customers, it means you spent … Online businesses can also improve CAC by increasing the site conversion rate, which can be far more efficient than optimizing marketing spends. If you're looking at a month's worth of marketing expenditure and comparing it to that month of sales, you're doing something wrong. The AMOUNT you'll have to pay, at the most basic level, is your CAC. That means getting customers – and usually, you'll have to pay to get those customers. In this example above CAC is calculated on a 60 day ago basis, meaning that Customer Acquisition Cost here is calculated by dividing Sales & Marketing Costs from 60 days prior (2 months) by the number of new customers acquired in a current month. Customer Acquisition Cost, as you know, is the cost of convincing a potential customer to buy a product or service. So it may take a few days for us to provide accurate data. At a number higher than three, there's probably room to grow, by investing in more marketing channels. Business 101 says this: If you've got a product, you need to sell it. Now to the meat and potatoes of the article… The best thing to do is to calculate the customer acquisition costs for all customers over a specified period of time rather than doing averages or picking a few optimistic examples from the bunch. If you imagine the number of times you'll pop into Target during your life (no matter where the location) and how much you'll spend there, you'll see how figuring out this amount of money can be crazy difficult. Online, things are a little easier, because most decent analytics software (including Google Analytics) can determine whether a visitor has been to the site before. If you're selling cars, it could be three months between someone seeing your ads and finally buying the car. Gives an idea of the average total cost spent on acquiring a new customer. The simplest pattern in which CAC are formed is as follows You determine CAC by dividing the total costs associated with acquisition by total new customers, within a specific time period. The CAC calculator above will give you a framework for working out a rough number for your business. Customer acquisition cost formula. How to calculate Customer Acquisition Cost (CAC)? Spend $100 on Facebook to get your first customer? For example, if a business spent $100 and acquired 2 customers, their customer acquisition cost (CAC) is … So … Scenario 1. Cost of proposals (in staff time) – in some industries, it is necessary to tender or bid for a new client/customer – this also contributes to customer acquisition costs. That's a thinner margin than we may have assumed on weekly revenues of $150,000 – because of the high CAC, her weekly profit is just $5000. Using the Customer Acquisition Cost Calculator By entering details relating to the sales and marketing expenses, the number of new customers acquired, customer subscription, gross margin %, and churn rate the customer acquisition cost calculator can be used to estimate the following. We're benchmarking your cost of customer acquisition as you read this. That's a far better way to improve CAC than by cutting marketing spend by 16%. Maybe you already calculate your Cost Per Action (CPA) or Cost Per Install (CPI) and have an attractive spreadsheet to send to your boss. But listen, customer acquisition cost (from here, 'CAC,' because let's face it, it's a mouthful...) is one of the most critical metrics out there. Retailing costs Potentially a retailer in a high traffic location could allocate a proportion of its rental costs to customer acquisition. During the quarter, you spent $5,000 on related employee salaries, $100 on an email marketing program, and $4,000 on social media ads. However, in the real world, that's not a fair calculation, and most business will apportion some of the ad spend as 'reactivation' spend. Use this free tool to find out how much it costs you to get a new customer. Customer acquisition cost (CAC) is a business's total cost of obtaining a new paying customer over a specific period of time. Your Free Event Customer Acquisition Cost Calculator. Add all the monthly costs and divide by the number of new customers per month. In the meantime, why not check out some of our other useful content for SaaS businesses? How should we deal with this? Customer … Now, if you’re wondering how to calculate customer acquisition cost and learn the CAC formula, make sure to read the following lines thoroughly. 20-22 Wenlock Road London, N1 7GU United Kingdom, Nickelled Ltd © 2014-2020 Terms & Policies, Include all non-publisher spend: CRM, social media management, mailing list software, etc etc, Include other spend such as agency fees, but do not include billed publisher spend if already included in question 3. How to Calculate Customer Acquisition Cost. Improving lifetime value is a whole different ballgame – it's a metric that speaks to the quality of your relationship with the customer and how integral your business is to them. This simple explanation illustrates the customer acquisition cost formula, which looks like this: In our calculator above, you'll see that we've asked you to sum most of the core inputs into the formula, but you could easily split out CAC by channel by dividing the total amount you spent on a single channel by the number of customers it produced. Spoiler – the average customer is worth a whopping $14k to Starbucks over the course of their life, but the methodology used to reach that figure is worth paying attention to, especially as there are several potential formulae at play. Use our simple calculator to get an estimate based on your actual data. To calculate the customer acquisition cost, divide the total acquisition costs by the total number of new customers. For other types of business, there may be better ways to work out the total value of a customer over their time with the company or product. Generate real ROI on customer acquisition, Enhance your retention marketing strategy, Create more effective messaging, targeting & nurturing. Enter values in USD, Enter values in years (rounded to the nearest 1), The Busy Founder's Guide to User Onboarding, ChartMogul Ultimate Guide to SaaS Customer Lifetime Value. The difficulty, especially offline, is knowing by how much to discount. Do you all know that it’s more costly to acquire new prospects than to retain existing ones! At the moment, we're gathering data from different companies to provide an accurate comparison. What is customer acquisition cost (CAC)? This company has used a customer retention calculation to determine that its customer lifetime value (CLV) is $2,000. Obviously if it costs $100 to acquire a customer to your website who only spends $40 during their lifetime then you are losing money. Answers to Frequently Asked Questions about CAC. So for May, that’d be dividing $71,375 by 643 — yielding a $111 CPA. 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