Written by special guest blogger, Neo Langley.
When creating a business, there is a myriad of different things you must keep track of and understand. The more information you have, the more effective you can make your business run. One such figure that is vital is customer acquisition cost.
In this article, we look at customer acquisition cost and what it means. We also discuss why it is so important, and how you can keep track of it for your business.
What is customer acquisition cost?
Simply put, Customer Acquisition Cost is the expense you incur to gain a new customer for your business i.e. a customer that makes a purchase or invests somehow in your products/services. There are several important parameters to bear in mind when looking at this cost:
- The period you intend to calculate your CAC for
- The included expenditure that contributes towards your CAC
- The type of customer that you include in the calculation
To create an accurate CAC, you must first define a period – for example, you could analyze it on a monthly basis. Next, you must define which costs directly contribute to gaining new customers – this should include expenses mainly relating to marketing and promotion.
Finally, you must also clearly define which customers are included in the calculation. For example, do you include new customers that have visited your website? Or should it only include new customers that have made a purchase?
Once you have found an overall cost for the period, and know how many customers you gained, you divide the total cost, by the number of customers, to find your CAC.
Why is this such an important figure?
So why does this figure even matter? When running a business, the aim is to be profitable. To be profitable you must have a clear understanding of all your expenses.
Marketing is often a large expense, but when seen as a total figure, it can have little meaning. If we translate it into something like a CAC, the cost of marketing becomes much more relevant and meaningful. For example, if you can see that you have a CAC of $5, but each new customer is only earning you an average profit of $5.00 something needs to change as the acquisition cost is effectively negating the average profit you make.
Using the CAC, you can better understand your business and marketing strategies. You can tailor them to make them more effective, and aim to bring the cost down so that ultimately you can make more profit.
CAC in action
Let’s look at an example to demonstrate a potential CAC figure. You want to calculate the CAC for the previous year and find a monthly average. This gives you a definite timeframe to work with.
You calculate that your total cost for marketing and relevant expenditure is $7598 for the year. In that period, you gained 3512 new customers that made a purchase at your online store. The CAC cost is, therefore, $7598 / 3512 = $2.16.
How to reduce your CAC?
So how can you reduce this figure and acquire new customers in a more effective manner? Firstly, you can utilize free resources like LogoCreator for your marketing and digital media. Secondly, you can utilize free marketing platforms such as Facebook, Instagram, and Twitter. Social media is a great way to reduce your marketing costs and thus drive your CAC down.
This is an important figure and if you want to be profitable, you should always keep track of your CAC. You should also utilize whatever free tools and resources you can find to help bring this figure down.