The cost of customer acquisition plays a pivotal role in sales strategy.
Ways to compute the cost of acquiring customers and finding appropriate measures to improve or maintain it
An entrepreneur is said to have a razor-sharp focus on his venture, always talking about teams, products or services, and markets with a major emphasis on the product. However, what most entrepreneurs fail to account for is the cost incurred (indirectly) in acquiring customers. If product failure is one of the primary causes for business failure, cost of acquisition is the next major reason. This happens because companies don’t know how to monetize the cost they incur while acquiring customers. Particularly when looking at startups, startup owners typically engage in various activities or campaigns for new customer acquisition only to get their product or service out to new users.
What is the Definition of Customer Acquisition Cost (CAC)?
A layman’s definition of CAC is the cost incurred in the form of various resources used to acquire new customers on a per customer basis. If you are a startup, you must determine customer acquisition cost at various stages in the customer acquisition process.
The formula to calculate the cost for customer acquisition is simple. Take the total amount spent and divide it by the number of customers acquired. This will give you the per customer acquisition cost.
Customer Acquisition Cost = Total acquisition spend ($ / No. of customers acquired)
If any organization follows the above formula, it will be able to calculate CAC easily. However, one factor that must be determined with impeccable detail is the total acquisition spends. What does the total spend comprise of? This value changes from organization to organization but the primary components that contribute to this figure are the costs of sales and marketing. Other components that fall under the heading of acquisition spends are sales incentives and commissions, free trials, and even referral campaigns that run across the organization.
Calculating customer acquisition cost provides key insights into daily functioning of crucial departments. These insights help customers to derive whether:
A company is spending a lot in customer acquisition without keeping track of the number of customers who are signing up.
A company is maintaining a balanced spend on customer acquisition, but customers are not signing up as expected
Periodical Computation of CAC
Even though lifetime statistics of customer acquisition costs is helpful to determine the trend in spending, companies may want to keep more periodic and real-time statistics to have access to more current data. This helps companies take corrective action immediately when necessary. The following formula determines the cost of customer acquisition on a per period basis:
CAC (Per Period) = Total Acquisition spend (over the period) / Total customers acquired (over the period)
Though the formula looks simple, a challenging factor is the total number of customers acquired. The best way to calculate the total number of customers acquired is by subtracting the total number of customers at the end of the period from the total number of customers at the beginning of the period.
Above computing customer acquisition cost on a frequent basis, companies also compute such costs on a per campaign basis. This gives more precise insight into the spend done by companies on marketing or advertising campaigns. This includes PPC (Pay Per Click) campaigns and other marketing campaigns like email marketing, newsletters, and event marketing.
Honestly, CAC looks like a trivial component, but it has a snowball effect on the overall expenditure of the department, particularly if ROI is not improving. There are a few important ways in which you can improve customer acquisition costs and bring it to a more optimum level.
Better Site Conversion Parameters
A good way to do this is by having clearly defined metrics on Google Analytics and conducting A/B split testing. This is important for companies who are selling their products online (e-commerce).
Improved User Value
User value simply means producing a better customer experience. This can be done by implementing new features and functionalities that customers are looking for and giving them a valuable experience. This will have a positive effect on the overall branding of the company and existing customers may end up either buying new products or becoming brand ambassadors for your company, referring new customers to you.
Aside from the duration of your company’s sales cycle, it is imperative to have a good CRM system that will allow you to monitor campaigns, track leads and help engage with the right customers. This must be a prerequisite in any customer acquisition strategy.
The bottom line is that customer acquisition costs cannot be neglected under any circumstance. To help your company obtain the desired ROI, it is advisable to keep customer acquisition costs to a minimum, but have a high monetization value attached to each customer.