How to Calculate the Cost of Customer Acquisition
Knowing your cost of customer acquisition is the key to unlocking higher marketing and sales ROI. After all, you can’t know what you’re really earning back from a customer without knowing what you spent to acquire them in the first place.
Modern technology tools have made it easier than ever to target the right customers and pinpoint exactly what you’re spending to convert them. When you calculate and optimize your cost of customer acquisition, you bring in more revenue on each customer you earn.
In this article, we’ll tell you what goes into your cost of customer acquisition, how to calculate it, and tactics for improving that you can implement right away.
- Cost of customer acquisition (CAC) is the total amount of money a company spends on acquiring new customers.
- CAC should be well balanced with customer lifetime value.
- Costs commonly included in CAC include salaries, technology tools, ad spend, and vendor costs.
- The primary way to improve CAC is through conversion rate optimization.
What does cost of customer acquisition mean?
Your cost of customer acquisition, also called customer acquisition cost (CAC), is the amount of money you must spend in order to acquire a new customer.
Companies use CAC to pinpoint the right amount of financial resources to invest in gaining new customers, with the goal of balancing it appropriately with customer lifetime value (CLV ot LTV). Many companies call this their CLV/CAC ratio, and it’s a metric they strive to get right. Ideally, CLV will heavily outweigh your cost of customer acquisition.
Cost of customer acquisition has increased in importance in recent years as technology has allowed for increasingly targeting marketing efforts. Before digital marketing, advertisers needed to cast the widest net possible and hope that it yielded results. The cost of customer acquisition was understandably high, but there weren’t too many ways around it.
Today, businesses can use technology to totally optimize their marketing and sales processes. Ads can be targeted to exactly the right customer segment at the appropriate time in their buyer journey, not to mention newer inbound tactics — namely content marketing — that can draw customers in organically.
Now, failing to calculate CAC and use it as a benchmark for performance and overall success is a missed opportunity for companies in any industry.
How to calculate cost of customer acquisition
The calculation itself is simple: add up all of your costs related to new customer acquisition for a fixed period of time (typically one year), and divide it by the number of customers you acquired during that time.
The more complex part of calculating cost of customer acquisition is identifying all of the sales and marketing costs that need to be included. Here are some of the most common:
- Salaries and other compensation – Employee costs like full-time salaries and other compensation for freelancers and contractors is typically the largest expense that goes into your CAC. Your marketing and sales teams should be included in this total.
- Vendors – Do you use third-party service providers that contribute to your CAC? A content marketing agency or digital advertising agency are two examples.
- Technology – What tools are you using to attract and manage customers? Some examples include your CRM system subscription, website CMS platform, or other analytics platform.
- Ad spend – Money you’re spending on paid ads.
Let’s consider an example:
In one year, a SaaS company spent $200,000 on full-time marketing and sales employee salaries. They spent $20,000 on technology tools, which include a CRM system, CMS system, and inbound marketing tool. They worked with a digital advertising agency to execute a $15,000 campaign. Finally, they paid $30,000 to freelance blog writers and graphic designers.
During that time, they acquired 1,700 new subscriptions to their software service.
To calculate their cost of customer acquisition, they would first add their costs:
$200,000 + $20,000 + $15,000 + $30,000 = $265,000
Then, they’d divide that $250,000 by their total number of new customers (subscriptions).
$265,000 / 1700 = $155.88
Their customer acquisition cost is $155.88.
How to improve your cost of customer acquisition
Once you know your customer acquisition cost, there are several tactics you can implement to improve it — even when you feel like it’s fairly healthy.
Improve conversion rate
The most impactful way to decrease your cost of customer acquisition is by converting more leads into paying customers. Optimize your website CTAs, forms, and sales process to make it as easy as possible for visitors to convert to leads and for leads to convert to customers.
Run a referral program
Did you know that 83% of B2B customers are willing to recommend a business after a good experience? Or that 78% of B2B referrals create viable leads for that business? Take advantage of this opportunity by starting a formal referral program. It can be as simple as offering discount incentives to customers who bring in new leads that convert.
Optimize your sales process
Take a look at your internal processes to find places where there are inefficiencies and areas for improvement. Time is money. Streamlining internal operations is a good way to eliminate costs.
Use a CRM system
CRM systems optimize your sales process by making it possible for you to track customers individually across every touch point they have with your company, ensuring no leads fall through the cracks or get bottlenecked in the sales process.
Our outbound email software and lead generation services are custom-built for startups, consultancies, marketing agencies, and other B2B organizations. Schedule a quick call with us and find out how we can help you win more clients.