What is it Customer Acquisition Cost? Following the Definition, How to Calculate and Examples
Ever heard of Customer Acquisition Cost or cost of customer acquisition? These are the things You should know, especially if You are an entrepreneur.
Getting new customers is not easy. This requires not only the efforts of sales but also there is a monetary cost involved. Monetary costs of this can be as low as 1000 dollars for deals worth up to 500,000, or as high as 150,000 for the same product.
Therefore, it is very important to calculate how much it costs to get new customers so that the business remains profitable for the long term, and this is called customer acquisition cost or cost of customer acquisition.
But what is it customer acquisition cos? How to count and examples in the real business?
The following guides answer all these questions.
What was the Cost of Customer Acquisition or Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) is the total cost of business to get new customers that pay for a certain period of time.
These costs include the cost of marketing and sales and salaries paid to employees to get customers on board.
CAC and lifetime value of the customer or the customer lifetime value (CLV) is considered as the deciding factor on whether a business has a business model and a decent income or not.
Lifetime value (CLV) tell how many are brought customers during the period of his life. These metrics, when compared with the cost to get a customer (CAC), generate profits earned business throughout the life of the customer.
Function Customer Acquisition Cost
The cost to get customers is an important metric for both: business and investors who invest in the business.
From the perspective of a business owner
these metrics convey the feasibility of the business model and what should be improved to get more profit. CAC and high CLV low, means the acquisition process at this time need to repair and CAC low implies that businesses spend money efficiently and will see higher profits.
From the point of view of investors
This metric is important to calculate how much investment required businesses to stay afloat. In addition, it also conveys the feasibility of this investment for investors because it helps to calculate the ROI.
For example, invested $ 1 million in a startup to help him market himself and to reach customers is only justified if the startup is quite feasible to produce more than the amount invested – the value of a lifetime should be more than the cost of the acquisition.
Although CAC is a KPI agnostic too segmented, CAC is often used by businesses that operate on the model of SAAS and subscription-based. Customers kind of business that last a long time, pay over and over, making CLV they are more of CAC them.
How To Calculate Customer Acquisition Cost
Generally, the CAC is calculated by dividing all the costs incurred to obtain new customers with the number of customers acquired in a certain period of time.
CAC = Total cost incurred to obtain new customers in a particular period / number of customers acquired in a given period
This cost includes all the costs of sales and marketing, which are further divided into:
- The cost of Marketing (M): the Total cost of marketing to get customers. These costs include the cost of advertising as well.
- The salary of the Employee (E): the Salary associated with marketing and sales.
- The cost of a Professional (P): Costs incurred for professional services such as design, consulting, etc.
- Cost of Sales (S): Cost of sales related commission (eCommerce, brokers, etc.).
- The cost of software and tools (ST): This includes all costs incurred to buy, run, and operate the software used in the process of marketing and sales.
- The cost of Other (O): All the additional overhead associated with marketing and sales, such as rent, equipment, etc. allocated to employees of marketing and sales.
So, the formula CAC is:
CAC = (M+E+P+S+ST+O) / CA or the number of customers acquired in a given period
CAC and CPA
Sometimes we frequently exchanged between the cost of customer acquisition (CAC) with is the cost-per-acquisition (NPA).
CAC explicitly measure the cost per acquisition of customers that pay.
BPA could be anything in addition to paying customers. It can be either a prospect, the user is enabled, the registration of the gnu free new, etc.
Both of these terms are related because the CPA is a major indicator towards the CPC, but the two are not the same.
For example, Spotify is spending a lot of money to get the user free new. The cost of user acquisition free this is referred to as cost-per-acquisition (CPA). Later, some of these users into user apps that pay, and the cost was translated to the CAC.
So, in the product freemium and SAAS like Spotify, Dropbox, SEMrush, etc. CAC also include a CPA (Cost to acquire users for free + the cost to develop a free product + the cost to support free products) because these costs are also included in the cost of marketing.
CAC (Freemium) = the cost to acquire users for free + the cost to develop a free product + the cost to support free product + the cost to convert free users into paid users.
CAC and CLV
CAC rarely calculated without CLV. It’s important to compare the cost of acquisition with the lifetime value of the customer to calculate the profit earned business and examine the feasibility of the business.
The ratio of CLV to CAC is important because it signifies the ROI:
- 1:1 – the business is at the point of break-even (no profit, no loss). A ratio of 1:1 means that the customer ends up paying exactly like the paid business to get it. Have that ratio indicates that a business must do something to reduce the cost of acquisition of or increase LTV.
- Less Than 1:1 – this means businesses pay more to get customers than paid back by the customer. This signifies the marketing strategy and financial wrong that needs to be fixed.
- 3:1 – this is the ratio of the level of a good that indicates that the business generates more than what was spent to get customers.
- Higher than 3:1 – Usually, a business that has a ratio of CLV to CAC is from 3:1 to survive for the long term.
That’s a full discussion about customer acquisition cost, which is important for a business owner. Counting the cost of acquisition is very useful for those of You who are choosing media to advertise and choose how promosp effective.
Remember, every cost that You spend the better it is for the promotion and marketing You should note in order to facilitate You in calculating the CAC and do the right pricing for the goods or service You sell.
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