When planning financially for your small business, it’s important to focus on the necessary costs that keep your business running. One of those costs to consider is your Customer Acquisition Cost (CAC).

What is Customer Acquisition Cost?

To keep it simple, your CAC is what it costs you to acquire a new customer. Knowing your customer acquisition costs will help you determine if what you’re putting into your business is worth what you’re getting out of it.

Let’s dive in a little deeper.

Customer Acquisition Costs Formula

customer acquisition cost formula

Calculating your CAC doesn’t have to be complicated. Dividing your total marketing costs by the number of customers acquired gets you your CAC.

According to GETVoip, “First, you’re going to narrow the scope of your data by identifying the time period you want to evaluate. Then you’re going to add up all of your sales and marketing expenses. Now divide the sum by the number of new customers you’ve acquired during that period. The result is the estimated cost for your company to acquire a new customer.”

For example, if you spent $500 on sponsored social media ads last month and you got 10 new customers, your CAC for that month would be $50.

If you are including other expenses such as software, salaries, or other outsourced services, your formula will include those expenses in the overall “marketing costs” portion of the formula.

Marketing Costs / Number of Customers Acquired = Customer Acquisition Cost

Some of the specific expenses that might go into your “Marketing Costs” include display advertising, search engine marketing, affiliate marketing, social media marketing, TV ads, or any other marketing costs you incur.

Employee salaries, production costs, technical costs, and inventory upkeep might also factor into your overall calculation.

Some things you won’t include when calculating your CAC are customer success costs, payment processing fees, and customer training costs. Any travel costs incurred to visit or serve current customers aren’t included either.

CACs vary by industry, so keep that in mind when determining if your overall cost seems too high. DemandJump put together a list of customer acquisition costs by industry to help you figure out if you’re in the ballpark. Here are just a few:

  • Travel: $7
  • Retail: $10
  • Manufacturing: $83
  • Transportation: $98
  • Marketing: $141
  • Real Estate: $213
  • Telecom: $315
  • Technology (software): $395

Your CAC will depend not only on the marketing methods you choose but on your industry, as the average varies quite a bit according to each type.

Reducing Customer Acquisition Costs

The cost of gaining customers has increased by 60% in the last six years. If your CAC seems too high for your industry and you’re struggling to keep your business profitable, here are a few ways you can reduce your costs.

Boost your conversion rate optimization.

The key to increasing conversion rate optimization is making sure your website is running as smoothly as possible. A functioning website will keep potential customers from getting frustrated and clicking off of your website. Now is the time to troubleshoot any technical issues that could discourage customers from investing in your product.

Implement a retargeting strategy.

Do visitors to your website often leave without purchasing anything? Retargeting is a way of reminding them about your products or services after they’ve left your site or abandoned their online cart. One way to do this is to run ad campaigns to place ads for your products on other websites that your customers are likely to visit.

Sometimes customers abandon carts because they’re not quite ready to make the purchase, or they simply got distracted and forgot. Either way, a gentle reminder can nudge them back in the direction of your products.

Create an affiliate program.

Creating an affiliate program is another way of lowering costs. Affiliates will do a good deal of your marketing for you by promoting your product or service to their audiences and receiving a percentage of sales in return. This also has the potential to expand your reach exponentially, all while taking some of the actual work of marketing off of your hands.

This option is easy to set up, flexible, and carries very little risk. It will also bring you targeted traffic at a low cost.

Use marketing automation.

Another great way to lower your CAC is to automate your marketing. Automating your process reduces personnel costs and allows your team to operate more efficiently.

Automating marketing also has the potential to boost lead generation and sales and reduce customer acquisition costs. Chatbots, email, and social media are areas of your business where you can easily implement automation.

Create engaging content.

Focusing on creating meaningful content will help you connect with your customers by teaching them about your product or service and building brand authority and trust. Blogging is a proven way to increase engagement and grow sales, and it helps establish your business as an authority. Social media content is another valuable option that can help you accomplish similar goals.

Well-written content, search engine optimization, accurate keyword choice, and steady promotion will get more eyes on your business as you build trust with potential buyers.

Another worthwhile endeavor to reduce your CAC is to look at your pricing methods to make sure your strategy is profitable for your business. There’s much more to profitable pricing than just numbers. Having a firm grasp on the psychological aspect of pricing and marketing will give you a better foundation for success.

Customer Acquisition Cost vs. Lifetime Value

Still not sure if your CAC is too high? You can compare your CAC to your customer lifetime value (CLV) to find out. Your CLV measures the value of a customer during their entire duration as your customer.

According to Qualtrics, “Knowing the CLV helps businesses develop strategies to acquire new customers and retain existing ones while maintaining profit margins.” While some businesses don’t calculate their CLV, there are formulas that can help you calculate yours and apply them to your business.

Now that you know how to determine customer acquisition cost, you can accurately gauge whether your marketing efforts are paying off and how you can tweak your strategy, if necessary.

The customer acquisition cost infographic below is courtesy of our colleagues at GETVoip.

How to Calculate Customer Acquisition Cost Formula

 

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