When starting an online business, many entrepreneurs are enthusiastic. They are delighted with the growing number of website visitors, the meteoric rise in the time they spend on it, and the decent conversion rates.
But when it comes to profit, some realize that it is not as expected. What if we said that in most cases this is due to incorrect calculation of the cost of attracting customers?
If you learn how to calculate it correctly, you can achieve maximum efficiency from advertising campaigns, as well as predict the marketing budget for the future. We will talk about how to do this below.
What is the customer acquisition cost or why calculate it?
Customer acquisition cost (CAC) is the total amount spent on acquiring one new customer.
What is CAC for? First, it helps you understand whether your customer acquisition efforts are paying off. CAC will help you find out how effectively your marketing budget is being used and adjust your marketing spend management.
Secondly, the CAC reflects how efficiently the business is operating and how productive its team is.
And of course, CAC helps to optimize marketing activities if the company attracts customers too expensively.
The CAC score depends on new customers and advertising and sales costs. This includes the salary of all marketing and sales staff, non-production costs for their maintenance, and the cost of marketing tools.
A careful and correct calculation of the CAC shows which customer acquisition channels work most effectively and which marketing steps are the best for investing in.
How to calculate the cost of a client?
To calculate the CAC, marketers use the following formula:
CAC = Sum of all expenses / number of clients who were attracted
Technically, the formula is correct. But to understand what exactly is meant by “the sum of all expenses” is rather difficult. Typically these are advertising costs, specialist salaries, software costs, additional service costs, and marketing and sales overheads.
To get the most accurate result, calculate the CAC separately for each advertising channel. This allows you to understand which of the channels has the lowest CAC and where exactly it is worth increasing marketing investments. By allocating more money to channels with a low acquisition cost, you will attract more users at no extra cost.
Which CAC is good?
To understand this, you need to learn another formula and a new indicator – LTV.
LTV is customer lifetime value or profit from an attracted customer for the entire time he stays with you.
LTV = average bill * number of orders per month * average margin * average customer lifetime
So, to understand which CAC is good, you need to look at the ratios of LTV and CAC:
1:1 or less – the business is a lossmaker.
2:1 – the cost of attracting customers is practically not paid off.
3:1 – the business model is almost perfect.
4:1 – your business is extremely productive.
The cherished optimal ratio is 3:1. And 4:1 is considered to be an ideal.
How to improve the cost efficiency of customer acquisition?
- Prove that your brand is trustworthy
In addition to creating a smart referral program, adding ratings on the site can positively affect new customer acquisition. Moreover, creating and posting reviews practically doesn’t require financial investments and at the same time leads to a significant increase in income.
- Create content interesting to customers
You can’t expect site visitors to actively attend and become your customers if they get bored. There are many ways to build interest in your brand and tell your company’s story in a compelling way. Post educational, curious, or inspirational content in the form of podcasts, videos, memes, and more.
- Focus on feedback
Whatever changes you would like to make, be sure to test them first with the help of your regular customers. If you find customers are frustrated or have little interest in a change, you should definitely listen to this feedback as you won’t attract new clients.
- Spend your money wisely
If you are ready to invest in customer acquisition, be sure to use proven marketing and sales channels. Don’t waste your time and money trying to revive some familiar but ineffective promotion mechanisms, as this can only negatively affect LTV/CAC ratio.
We hope you understand how important the CAC metric is, and it probably isn’t worth mentioning how harmful its miscalculation can be. Therefore, if you want to get it right from the start, you should monitor all your marketing and sales expenses on a daily basis, and then use this data to get reliable reports over a longer period. May your business be successful!