BlogCommunityWhat is the Customer Acquisition Cost?

What is the Customer Acquisition Cost?

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Imagine seeing something more than once at some point and having no clue as to what it means. We’re referring to the customer acquisition cost (CAC). We believe this is a very familiar concept in the corporate world. What does it mean anyway?

The customer acquisition cost is simply the cost of persuasion involved in getting a potential buyer or client to patronize a certain company by purchasing their products or services. 

Customer acquisition costs came into being with the advent of digital companies and online advertising campaigns that are trackable. This is a metric used by organizations to track their customers. Nowadays, several online firms get involved in campaigns highly targeted at monitoring their customers. They observe how they evolve from leads to long-standing clients. 

The CAC metric isn’t limited to just the organizations; investors use it as well. These are the two parties concerned with this metric. Investors utilize this metric to determine the potential of a new firm in the internet technology industry. They can determine the profit-making ability of a company through this metric by subtracting how much they earn per customer from the extraction costs.

For instance, the costs to organize marketing and advertising campaigns to boost sales might be more than the total sales incurred. 

As for the company, this task usually falls on their marketing experts. They can also outsource the operations. They use this metric to analyze the profit from their advertising costs. That means the difference between sales and the total cost spent on the advertising campaign. They find ways to lessen the company’s expenses where possible to maximize the profits. 

This is just the icing on the cake. The real juice is down below. 

As you read on, you’ll know how to measure the customer acquisition cost and how this metric can be enhanced for the organization’s benefit. 

We’ll start by asking: what is involved in customer acquisition cost?

The Elements of Customer Acquisition Cost

  • The cost of advertising
  • What will your team of salespeople/marketers cost?
  • Cost of creativity
  • Technical expenses
  • Cost of publishing
  • Cost of production
  • Inventory management

Now, let’s get to the main meat of this article. 

How Can Customer Acquisition Cost be Quantified or Measured?

Well, the summary of the whole process of estimating this metric is presented below:

CAC = advertising/marketing expenses รท quantity of customers (acquired when such a marketing campaign was executed). 

Let’s take, for instance, marketing campaigns for the year that cost a certain company $100,000, and it got them, 2000 customers, in that same period. In that case, your CAC will be:

$100,000 รท 2000 = $50.

So, your customer acquisition cost is 50 dollars.

In addition, you must also understand that there are exceptions to the measurement of this metric. 

If an organization has invested in a marketing campaign for an uncharted territory or the initial phases of search engine optimization, the dividends to be realized from this aren’t until much later. It won’t be easy to calculate the customer acquisition cost due to its time-sensitive nature. 

Let’s quickly paint a real-time scenario with this. 

A group of business-oriented friends pooled resources to start up an affiliate marketing company. They meet with several mid-scale companies and offer to promote and sell their products for a certain percentage on each purchase triggered through their site. They proceed to hire a team of marketers and advertisers to launch and execute campaigns spanning six months. This cost them $30,000. To calculate their CAC, they will divide the money spent acquiring customers by the number of clients they get during those six months. Of course, anything beyond six months might complicate the calculation. 

Let’s look at another scenario.

A certain firm is into the production and sales of animal food. They executed several marketing and advertising campaigns the previous month. This cost the firm $50,000, and in turn, the campaigns yielded 5,000 customers/orders for animal food. Calculating the CAC for that month will be pretty straightforward. It will be $10. 

Now, this might look insignificant for an entire company. 

Let’s assume that the average value of each order placed by a client is worth $30, and the company has a 100% turnover from each purchase. This will mean that the company will make an average of $15 profit from each purchase and $3 from each client (this will be used to settle staff salaries, site hosting, rent, and miscellaneous expenses). Are you wondering how we arrived at $3? 

The average value per order is $30. Divide it by the total CAC of $10 to get the CAC per client.

From this scenario, it’s obvious that this firm is still struggling because 3 dollars from 5000 orders will amount to 15,000 dollars which is barely enough to foot the expenses mentioned above. What if these clients patronize only once? How worse can it possibly get?

This is where customer lifetime value pitches in. This metric can be calculated by multiplying the average annual sales quantity by the average period a client has been with the firm

How to Improve Customer Acquisition Cost?

Firstly, this can be done by enhancing the site’s conversion metrics. Improve or experiment with new checkout interfaces to discourage clients from abandoning their shopping carts. Also, make the landing page more attractive and SEO-friendly. Finally, improve the site’s overall loading speed and optimization. 

Secondly, increase the acquisition value of your clients. You can do this by coming up with innovative ways to keep them longer on your site. This will lead to them buying more of your products. For instance, a company that sells mobile phones can display related product catalogs to any customer who adds a phone to their shopping cart. As a result, related products such as a phone pouch, protective screen cover, earphones, and headphones will likely be purchased by a customer who just added a phone to their shopping cart. 

Thirdly, you need to enhance customer relations. This improves the rate of clients/customers retention by an organization. 

Conclusion

This article contains details on the meaning of CAC, the elements involved in CAC, how it can be calculated or measured, a sneak peek into a related metric known as CLV (customer lifetime value), and how CAC can be enhanced for the benefit of the firm. 

We’ll love to hear your thoughts on this article. What do you think about the elements here? Also, are there other ways to improve the customer acquisition cost for a company? Let us know your thoughts. 

References: https://neilpatel.com/blog/customer-acquisition-cost/

About AbstractOps

Do you want to analysis your customer acquisition costs? AbstractOps helps manage and automates your HR, finance, and legal ops so that you can focus on your customers. If you have any questions about how to improve your customer acquisition costs, email us at hello@abstractops.com. Weโ€™ll do our best to help.

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