The Cost of Acquiring Customers

You can’t put a price tag on happiness, love, or peace of mind…but you CAN put it on a customer.

For most businesses, the name of the game is growth. You want more revenue, more contracts, more sales, and so on. The simplest solution is to get your products or services into more hands, right? More customers = more profits.

Yes. And also, no.

A key metric your business should be evaluating on the reg is Customer Acquisition Cost (CAC). This is basically how much money you spend to convince someone to patronize your business. It’s a pretty simple formula: Divide the amount you spend on marketing, sales, advertising, etc., by the number of customers, and that number is your CAC.

Now, compare that number to your revenue. How does it stack up? If your customer acquisition cost is more than the revenue you’re bringing in, your business isn’t going to be in business for very long. 

Any competent marketing professional or agency worth their salt should be keeping a close eye on these metrics and reporting the numbers to you on a regular basis. (If they aren’t, fire them.) On the other hand, if you're a small business owner whose marketing is all done in-house, make it a point to pay closer attention to these calculations. You might be (unpleasantly) surprised by what you discover.

How Do I Determine My CAC?

As we said above, the formula itself is pretty simple.

1. Make a list of all your costs associated with customer attraction over a determined period of time. This could include: email marketing, social media campaigns, salaries for people on your sales or marketing team, television/print/radio advertising, and production costs (brochures, business cards, flyers). 

2. Add up the number of new customers you acquired during that same period of time.

3. Now, divide Expenses by Customers to get your CAC and compare it to your revenue.

How Can I Improve My CAC?

Even if you’re feeling pretty good about your results, there’s always room for improvement. Here are a few methods to consider:

• Use A/B testing and review analytics for social media campaigns to determine which ads perform better and when. For example, if you notice that most leads convert between 2:00 PM - 9:00 PM Tuesdays - Saturdays, only run ads during that time.
• Analyze your email marketing to determine which emails had better CTR (click-through rates) and sales conversions. Replicate those.
• Reevaluate WHO your target audience is and make sure your sales and marketing strategies are in alignment.
• Consider affiliate programs.
• If you have an e-commerce site, make sure the process is simple and straightforward. Those fancy ads mean nothing if it takes a Ph.D. to figure out how to navigate your checkout page.
• Increase your average order value. Give options for upgrades during checkout - and obviously, have your sales team upsell whenever possible. 
• Focus on retaining your current customers. It’s the best-known secret that it takes significantly more money to attract NEW customers than keep the old ones. 

Understanding your Customer Acquisition Cost is an essential metric for long-term sustainability and profitability. Whether you have hopes of scaling, expanding, or even selling your business - the CAC will play a critical role.