‘Unlimited’ is an imaginary concept as everything human beings do or desire comes with restrictions. Limits are part and parcel of everything from personal lives to businesses and, lastly, customer acquisition. From the limitation phenomenon, we can come to terms with what customer acquisition cost is. Customer Acquisition Cost or CAC is the cost that a business incurs while acquiring a new customer. All companies want to rope in as many customers as possible, but it implies going bankrupt in the process. Therefore, Customer Acquisition Cost or CAC is that feasible balance for businesses that determines the resources incurred to acquire an additional customer. Coupled with the Customer Lifetime Value (LTV) metric, CAC becomes a fundamental instrument to measure the value generated by a new customer.
How to Calculate Customer Acquisition Cost for a New Online Business
In a layperson’s language, Customer Acquisition Cost equals the amount spent on sales and marketing divided by the number of customers the business could rope in during the stipulated period. Some of the factors that influence Customer Acquisition Cost include –
- Duration of Sales Cycle
- Value of Purchase
- Frequency of Purchase
- Lifespan of Customer
- Customer Maturity
Now that we know the basics of Customer Acquisition Cost let us see how to calculate it –
Customer Acquisition Cost =
Here, sales and marketing expenses include all the costs incurred in advertising, marketing, commissions, and bonuses paid salaries of marketers and sales managers, overhead costs related to marketing over the stipulated timeframe. Likewise, the ‘number of new customers’ equals the total number of new customers that the business has acquired within the measurement period. Let us try to understand CAC with the help of an example.
Let us assume that a new customer-oriented online business spends USD 5000 on sales and USD 1000 on marketing to rope in new customers. Therefore, the company’s CAC will be
CAC = (5000 +1000)/1000 = 6000/1000 = 60
Thus, CAC = USD 60
It means that the online business invests USD 60 to acquire each new customer.
Importance of Customer Acquisition Cost
- Improving Return on Investment – CAC is a vital business metric that a new online business can co-opt to analyze its marketing return on investment. A new company can determine the most cost-effective way to acquire new customers using CAC.
- Improvement Profitability and Profit Margin – Understanding Customer Acquisition Cost offers a new online business with the potential to comprehensively analyze the value per customer and improve its profit margins.
- Competitive Edge – A company that can co-opt Customer Acquisition Cost has a competitive edge over its peers. Simultaneously, a new online business that does not understand CAC would adversely affect profitability by failing to understand how their social media channels should function.
LTV and CAC – A Quick Comparison
A metric that companies, both old and new, can utilize in relation to Customer Acquisition Cost is Customer Lifetime Value or LTV. We can understand LTV as the ostensible revenue that one customer will generate throughout their relationship with a company. Some of the variables required to calculate LTV include Average Purchase Value, Average Customer Lifespan, Customer Value, and so forth. We can find the LTV by multiplying the Customer Value with the Average Customer Lifespan. The consequent result will estimate how much revenue we can expect from a customer to generate during the stint of their relationship with the company. The LTV to CAC ratio is an excellent indicator of a customer’s value vis-à-vis the investment accrued to earn them.
It is essential to find the optimal LTV to CAC ratio to ensure they are churning out the most from their financial investments. In an ideal scenario, a new online business should take one year to recover the cost of acquiring a new customer. The golden ratio when it comes to LTV and CAC is 3:1. In more straightforward language, customers’ value to a company should be thrice the amount spent on acquiring them. In case the LTV-CAC ratio is close to 1:1, it implies that a company is making the same amount of money from their customers as they are investing in acquiring them.
What Does a Good CAC Look Like?
There is nothing like a quintessential good CAC. The feasible CAC varies from industry to industry. Therefore, the way out through the CAC puzzle is to understand what the average CAC of different industries looks like. Knowledge about the industry-specific CAC is indispensable to stay afloat in today’s intensely competitive world.
· Retail Sector – USD 10
· Consumer Goods Industry – USD 22
· Manufacturing Industry – USD 83
· Transportation Sector – USD 93
· Marketing Agency – USD 141
· Financial Sector – USD 171
· Technology or Hardware – USD 182
· Real Estate – USD 213
· Banking or Insurance Sector – USD 303
· Telecom – USD 315
· Technology or Software – USD 395
Tips to Improve Customer Acquisition Cost
Investment in Conversion Rate Optimization (CRO) – New online brand should ensure that it is to convert visitors into leads or leads into customers. Optimizing the online website for a seamless mobile shopping experience, having an excellent customer service team, and investing in localization are a few foolproof techniques to improve CRO.
Value Addition – It is the hour’s need for all new businesses to increase customer value by offering them what they need. Processes such as collecting customer feedback offering complementary services can help a brand improve its overall CAC.
Curate a Referral Program – Without a doubt, referral programs are excellent for getting new leads and satisfying customers simultaneously. It is essential to construct a referral policy that is enticing and interactive so that your customers would want to engage in the same wholeheartedly.
Concluding Thoughts
Customer Acquisition Cost is a catchall metric that considers all the leads, irrespective of their origin. The CAC of a new online business will vary depending on several factors such as length of the sales cycle, purchase lifespan, and customer LTV.
