Bringing in new customers is crucial in helping your business grow. However, acquiring new clients is not only an important pillar of your business strategy for growth, it is also a significant cost factor. It is important to be aware of your customer acquisition cost to gain insight into how effective your sales and marketing are. This is why we've compiled this short guide to calculating your customer acquisition cost.
Customer acquisition cost - explained
The customer acquisition cost describes the total cost of sales and marketing spend required for your company to gain a new customer. Including various variables, such as expenditure on advertisements, inventory, salaries, commissions, technical costs, overheads, creative costs, and bonuses, getting an idea of your company's customer acquisition cost can help you get an understanding of how viable your business is.
Calculating customer acquisition cost
Firstly, costs stemming from customer success tasks are not considered and calculated as part of the customer acquisition cost. While customer success is part of successful customer relationship management, the customer acquisition cost specifically refers to generating revenue through sales and marketing efforts.
To arrive at your business's customer acquisition cost, divide the total expenses of the acquisition process by the total number of customers acquired within a specified time period. The formula is as follows: CAC = Total Cost of Sales and Marketing / Number of Customers Acquired.
Company X is actively acquiring customers. It spends GPB 5,000 on sales and GPB 7,000 on marketing expenses within a month. Within that month, it brings 35 new paying customers to the business. The formula would then go as follows: CAC = (5000 + 7000) / 35 = GPB 342.
Customer retention vs customer acquisition
In simple terms, customer retention refers to the money spent on keeping customers and thereby increasing customer lifetime. Companies tend to focus on their customer acquisition costs rather than retention costs. However, acquiring new customers tends to be more expensive than improving retention rates. So while it is important to improve customer acquisition cost, it is even more crucial to improve or even implement customer relationship management to improve retention rates.
How to interpret customer acquisition cost
After calculating your customer acquisition cost, it is advisable to pair it with lifetime customer value (LTV). This calculates the total amount of revenue that your customers are likely to generate. By calculating the ratio of customer acquisition cost and customer lifetime value, you can understand how profitable your customer acquisition process really is.
Of course, lowering your customer acquisition cost can help reduce overall business expenses and make your company more profitable. A good place to start is to review and improve your pricing strategy. It can be advisable to use a skimming pricing strategy to ensure that more upfront cash is received on your end to recover your CAC.