February 28, 2023
5 Steps to Calculate Your Customer Acquisition Cost & Why It Is Important to Know
Anytime that you convert a lead into a paying customer, there is an associated price. This price is called the customer acquisition cost and is the amount you pay to take them. Typically, the customer acquisition cost is built into your annual marketing budget, making it a relatively high expense.
A problem arises when you don’t know what your customer acquisition cost is or when it is higher than the lifetime value that they bring to your company. Let’s figure out what goes into calculating your CAC, how it impacts business growth and what steps you need to take to find yours.
What Goes into a Customer Acquisition Cost?
There are a few things that make up the price of acquiring customers. You must pay your employees, budget for marketing, research your customer base, and spend on items like software and advertising.
- Your annual marketing budget percentage.
- The cost of your product lineup.
- Agency costs.
- Research costs.
- Capital spent on software.
- Capital spent on advertising.
- Overhead costs for taxes, unemployment, employee training/hiring.
How Does Your Customer Acquisition Cost Impact Your Business?
As long as your custom acquisition cost is less than their lifetime value, then the CAC is going to positively impact your business in 3 ways.
- Make your business more profitable. A higher lifetime value will bring in more revenue to your company. You want to expand the ratio so that the lifetime value of the customer is much larger than the cost it takes to acquire them. Profits should outweigh the cost of getting them on board.
- You can see how long it will take for the customer to be profitable for you. By knowing what your customer acquisition cost is, you can determine the return on investment for your marketing efforts. This will tell you how long it takes for a new customer to be profitable for you. Or, in the other words, how long it takes for you to repay the debt of bringing them on board.
- A CAC will indicate scalability. If you have a high ratio between customer acquisition cost and lifetime value, then this indicates that your business will scale well into the future. If you have a weak CAC to LTV, you won’t scale well, and investors may be hesitant to get on board.
5 Steps to Find Your Customer Acquisition Cost
1. Define the Measurement of CAC. You first must determine which customer acquisition cost time period you are interested in. You may want to measure a specific campaign for bringing on new customers that occurred over the past 6 months or maybe you want to know the total cost since the start of your business. Decide on this time period first before jumping into any other step below.
2. Tally Up All Sources of Acquisition Spend. The sources that you get for this step is determined by what time period you are measuring. If you want to calculate the total customer acquisition cost since the beginning of your business, then grab your employees’ salaries and costs of benefits for those working in lead generation. If you want to measure a specific campaign, grab the time spent of each employee who worked on the marketing efforts and divide it by their annual gross salaries.
3. How Many Customers Did You Take On? If you are looking at your lifetime customer acquisition costs, then grab all leads that were converted into customers across all products and services. If you are measuring a specific campaign period, only grab all customers brought on board as a result of that specific campaign.
4. Grab a Calculator! Take your total acquisition spend and divide it by the total number of new clients you have acquired. The formula goes as such:
Marketing campaign costs + wages for marketing and sales + Total cost of marketing and sales software + additional professional services done by marketing & sales individuals + other overheads related to marketing and sales ÷ customers acquired = customer acquisition cost.
Congratulations, this is your CAC number!
5. Now Compare the CAC to the LTV. Knowing your customer acquisition cost isn’t going to help you unless you compare it with your lifetime value number. You want your lifetime value number to be around 3X that of your customer acquisition cost, as this indicates steady growth.
While there are a lot of numbers involved with calculating your customer acquisition cost, it is worth crunching as it can give you insight into your marketing ROI, your scalability, and your rate of growth.
Speak to one of our team members to build and implement a full marketing plan that works to accomplish your business goals!
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