Spend $100 on Facebook to get your first customer? So, without wasting a single minute, let’s understand the customer acquisition formula. A CAC calculation compares the amount of money a company spends attracting new customers with the number of customers the company actually acquires. Grasp it and work with it... And you'll be on a fast-track to success. Generate real ROI on customer acquisition, Enhance your retention marketing strategy, Create more effective messaging, targeting & nurturing. HOW TO CALCULATE CUSTOMER ACQUISITION COST. Let's imagine a SaaS business which keeps its customers for 12 months, on average. Fail to understand it, and your business will sink. Use our simple calculator to get an estimate based on your actual data. Basic Customer Acquisition Cost Formula In theory, customer acquisition cost should be a simple calculation, but it can vary depending on your business model. This is done by dividing the total amount spent on customer acquisition by the total number of customers acquired, as shown in the equation below. That means getting customers – and usually, Customer acquisition cost is the amount spent to acquire a new customer. If you want to understand how to do this for yourself (with more accuracy), read on. Tracking customer acquisition cost accurately is a difficult business, especially if you have a blend of marketing channels. The Customer Acquisition Cost (CAC) is a metric used to determine the total average cost your company spends to acquire a new customer. Now the CAC calculation becomes more complicated because we have to work out the value of the customer through their entire life (known as lifetime value or customer lifetime value... or LTV or CLTV). If your costs to get the customer through the door are higher than your Customer Lifetime Value (CLTV, LTV) than the business cannot be viable. Calculate your average time to break even on new customer acquisitions. We're benchmarking your cost of customer acquisition as you read this. The cost of customer acquisition is one of the most important metrics — SaaS businesses must keep a close eye on it at all times because of their unique circumstances. Compare your metrics to other businesses of your size and type. How to Calculate Customer Acquisition Cost. Hopefully, you can see that although nuance is required, CAC and LTV remain two of the most useful metrics businesses have. To calculate the customer acquisition cost, divide the total acquisition costs by the total number of new customers. Business 101 says this: If you've got a product, you need to sell it. That payment could take any form; it could be advertising on Facebook, buying ads through Google AdWords, sending out flyers to peoples' letterboxes or standing on a street corner trying to sign them up. To build a viable business, your revenue from a customer MUST exceed the money that you spent to acquire that customer. For other types of business, there may be better ways to work out the total value of a customer over their time with the company or product. The best rule of thumb is to be spending 33% or less of your average customer lifetime value. That's why you should pair CAC with LTV (and why we did above) – it's a measurement of profitability. You will get to know your company’s expenditure on acquiring new customers with Customer Acquisition Cost Calculator. Customer Acquisition Costs (CAC) means the amount of money you pay in order to attract a new customer and earn their loyalty. Sales and Marketing Cost = Program and advertising spend + salaries + commissions and bonuses + overhead in an year. This company has used a customer retention calculation to determine that its customer lifetime value (CLV) is $2,000. Your CAC is $100. For instance, if you have an average of 230 new customers a month, maintenance costs of $2,000 per month, start-up costs which average to $100 per month over a one-year period, and average promotions costing $200 per month, the cost of acquiring one customer … Cost of proposals (in staff time) – in some industries, it is necessary to tender or bid for a new client/customer – this also contributes to customer acquisition costs. Gives an idea of the average total cost spent on acquiring a new customer. This can help a company decide how much it can spend against the value of an asset. Enter values in USD, Enter values in years (rounded to the nearest 1), The Busy Founder's Guide to User Onboarding, ChartMogul Ultimate Guide to SaaS Customer Lifetime Value. Divide your costs by the total number of new clients and there you have it – your customer acquisition cost. In this example above CAC is calculated on a 60 day ago basis, meaning that Customer Acquisition Cost here is calculated by dividing Sales & Marketing Costs from 60 days prior (2 months) by the number of new customers acquired in a current month. Each product costs you $50, so you add a 100% markup, enabling … For SaaS businesses, LTV looks like this: If you want more information on calculating LTV, we recommend the ChartMogul Ultimate Guide to SaaS Customer Lifetime Value. Now to the meat and potatoes of the article… The best thing to do is to calculate the customer acquisition costs for all customers over a specified period of time rather than doing averages or picking a few optimistic examples from the bunch. How to Calculate Customer Acquisition Cost. If you signed up for a 'starter' bank account as a teenager and signed a mortgage loan with the same bank as an adult 20 years later, you've seen this in action. Customer acquisition cost (CAC) is a business's total cost of obtaining a new paying customer over a specific period of time. However, the best businesses combine increased retention with increased spend – steadily upselling over time, so that they grow more valuable to the company as they progress through their time as a customer. If you imagine the number of times you'll pop into Target during your life (no matter where the location) and how much you'll spend there, you'll see how figuring out this amount of money can be crazy difficult. At lower than three, margins are squeezed, and the total headroom for the business may be questioned. Gives an idea of the average total cost spent on acquiring a new customer. How To Calculate Customer Acquisition Cost. Customer acquisition cost is the best approximation of the total cost of acquiring a new customer. Spend $100 on PPC and $50 on mailed flyers and end up with two customers? Whatever method you choose, you'll have to pay for it (yes... even the last one – it's a time cost!). New Customers are a number of new customers in a month, quarter, or year, How We Helped Lendingkart Achieve Business Growth of 20% Through Google Ads, How we Increased Paysquare’s Website Traffic by Over 70%, Multi-Pronged Campaign Drove 40% Business Growth for deAzzle, Helped Masakha Become Pune's Top Seafood Restaurant, ©2021-22 UpGrowth    Cities We Serve: Pune, Mumbai, Bangalore, Delhi, Kolkata, Cities We Serve: Pune, Mumbai, Bangalore, Delhi, Kolkata. That means getting customers – and usually, you'll have to pay to get those customers. The customer acquisition cost (CAC or CoCA) means the price you pay to acquire a new customer. Customer Acquisition Cost Calculator (CAC) The Customer Acquisition Cost (CAC) is a metric used to determine the total average cost your company spends to acquire a new customer. However, in the real world, that's not a fair calculation, and most business will apportion some of the ad spend as 'reactivation' spend. What to Include In CAC? The CAC calculator above will give you a framework for working out a rough number for your business. Calculating your brand’s customer acquisition cost allows you to assess their acquisition spending at the most granular level on a per customer basis. So it may take a few days for us to provide accurate data. Each car costs $15,000, and the profit the dealer will make on the vehicle is $3,000 – giving her a gross profit of $30,000. Your CAC is $75 ($150 / two customers). Do you all know that it’s more costly to acquire new prospects than to retain existing ones! Let’s say you want to calculate your customer acquisition cost for the quarter. Don't worry, we'll reach out on email as soon as we're done. That's a thinner margin than we may have assumed on weekly revenues of $150,000 – because of the high CAC, her weekly profit is just $5000. Customer acquisition cost: ($1,020,000 / 1,020,000 customers) + $1.00 per customer = $2.00 As in our previous example, the amount is worth only the money extracted from customers. Why is it important to know CAC? We'll email your report as soon as we've gathered 10 anonymized submissions from companies of your size. For example, let’s pretend that your company wants to establish the CAC for the last 6 months. In its simplest form, it can be worked out by: Dividing the total costs associated with acquisition by total new customers, within a specific time period Armed with these two figures (assuming the LTV doesn't change), we can infer that the profitability per customer is $1000. LTV = 3 * CAC So, as a customer acquisition cost example, if a company’s CAC is $100, then as per the equation, its LTV should be $300. That’s why extending your CLV is essential to a healthy business model & overall business strategy…. Now, every month, their customers pay them $100 on average, which means that over the lifetime of the customer, they will hand over an average of $1200. First of all, CAC can have a LONG lead time. For example, there are multiple considerations in calculating the cost of customer acquisition for customers that joined via a free trial: Thirdly, you'll need to know your customers very well. Throws light on the efficiency of your sales and marketing efforts. This field is for validation purposes and should be left unchanged. Technically CAC is the cost to acquire a NEW customer – for the purists out there, the repeat customer should be ignored altogether. Improving CAC can be achieved by optimizing marketing spends, cutting down on wasteful channels, improving targeting, using more free or lower-cost distribution methods (e.g., viral content, partnerships or freemium offerings) or reducing the total hours-per-deal (to cut people costs). Online, things are a little easier, because most decent analytics software (including Google Analytics) can determine whether a visitor has been to the site before. Improving lifetime value is a whole different ballgame – it's a metric that speaks to the quality of your relationship with the customer and how integral your business is to them. Add all the monthly costs and divide by the number of new customers per month. The simplest pattern in which CAC are formed is as follows You determine CAC by dividing the total costs associated with acquisition by total new customers, within a specific time period. At the moment, we're gathering data from different companies to provide an accurate comparison. Do you know what your Customer Acquisition Cost (CAC) is? Basic maths tells us that we can improve a business's metrics in two ways – reducing the cost of customer acquisition or improving the lifetime value of the customer. Customer Acquisition Cost, as you know, is the cost of convincing a potential customer to buy a product or service. Armed with all this theory, it shouldn't be a stretch to calculate your own CAC and LTV, whether you use the calculator above or not. This simple explanation illustrates the customer acquisition cost formula, which looks like this: In our calculator above, you'll see that we've asked you to sum most of the core inputs into the formula, but you could easily split out CAC by channel by dividing the total amount you spent on a single channel by the number of customers it produced. Now, if you’re wondering how to calculate customer acquisition cost and learn the CAC formula, make sure to read the following lines thoroughly. 1. Let's imagine an auto dealership that sells ten cars a week, and never sees any repeat business. Scenario 1. Here is an Ebook on 7 vital metrics every startup founder should know – you need to read if you want to increase profitability, retention and overall ecommerce success. Use this free tool to find out how much it costs you to get a new customer. The formula is total sales and marketing spend over a specific period, divided by the number of new customers over that same period. For most B2B SaaS businesses, the costs of acquiring a new customer are determined by two factors: The costs of generating a lead (usually determined by marketing expenses). Customer acquisition cost: ($1,020,000 spent / 1,020,000 new customers) + $1 per customer = $2 From this customer acquisition cost example, the amount is worth only the money retained from customers. You do this by… 1. However, to keep up that flow of car-buying customers, the dealer is spending $25,000 on newspaper ads every week. You'll need to decide on how to treat repeat customers in your CAC calculations – we'd typically err on the side of caution and discount them altogether. The above formula is only your starting point. For many businesses, this might be very simple – if you sell cars, for instance, people will buy very infrequently and so the total value of that customer is probably just the profit on one car. In the meantime, why not check out some of our other useful content for SaaS businesses? The difficulty, especially offline, is knowing by how much to discount. Maybe you already calculate your Cost Per Action (CPA) or Cost Per Install (CPI) and have an attractive spreadsheet to send to your boss. If you want to calculate CAC using more than the simple calculator above, there are a couple of gotchas you should know. For example if you spend £100 on sales and marketing for a product, and in return get 5 new customers, it means you spent … Customer acquisition cost is an important business metric used to evaluate the cost of acquiring a new customer. During the quarter, you spent $5,000 on related employee salaries, $100 on an email marketing program, and $4,000 on social media ads. Customer acquisition cost is designed to measure and maintain the profitability of your acquisition teams. Increasing the 'life' of the customer (also known as customer retention) is one way to tackle lifetime value improvement – stop a customer from churning so soon, and they'll spend more over their lifetime. How to calculate Customer Acquisition Cost (CAC)? So, the customer acquisition cost formula is as follows: A look at some of the principles behind CAC, CLV, LTV and all those other acronyms... We can all agree that there are a lot of metrics to measure running ANY business. So, perhaps the total bill of $100 for the advert is discounted by 10%, meaning the CAC is $45 rather than $50 (because the ad spent to acquire those new customers is now $90). So … How should we deal with this? What is customer acquisition cost (CAC)? For example, imagine a $100 ad for a bakery in a local newspaper results in two new customers, but it also prompts a customer who hasn't bought in the past two years to try the bakery again. Dividing that $25,000 by the ten customers means her CAC is $2500. In this case we will include all the above costs – including staff costs – to determine that total acquisition costs are $5 million. If you’ve ever googled customer acquisition cost formula, you’ve probably found out that it looks pretty simple: Add up these expenses to reach your total costs. Keeps a tab on your sales and marketing spend because an increase in CAC indicates there is an underlying problem. Unless you know for sure that x% of the readership has already visited the bakery, it's nearly impossible to do – so you'll need to guess. You work for an e-commerce company that sells products to customers for $100 each. So if a $100 Facebook advertising campaign yielded the same results, it would be reasonably easy to see that (for example) 20% of the traffic had already visited before and therefore only $80 of spending should be treated as 'new' CAC spend (giving us a CAC of $40). High CAC is an indicator of some issue in your business process. CUSTOMER ACQUISITION COST Customer acquisition cost (CAC) shows exactly how much it costs to acquire new customers and how much value they bring to your business. Customer acquisition cost is designed to tell you how much you need to spend to acquire a single new customer. However, we'll cover this more in the next section... A common question when working with lifetime value is how to deal with customers that have been 'reactivated' by marketing. Using the Customer Acquisition Cost Calculator By entering details relating to the sales and marketing expenses, the number of new customers acquired, customer subscription, gross margin %, and churn rate the customer acquisition cost calculator can be used to estimate the following. To produce an accurate CAC you need to factor in associated costs such as staff time, subscriptions to products related to marketing (web hosting, for instance), and other hidden expenses such as discounts you've offered in promotional materials or the support time that's gone into supporting somebody who's taken a free trial or test drive. The AMOUNT you'll have to pay, at the most basic level, is your CAC. Now imagine the company spent $1000 on marketing and related expenses last month, and acquired five customers, making their CAC $200. This company has used a calculation to determine customer retention and its customer lifetime value (CLV) is $2,000. In order to ensure that the website is positively contributing to the company’s bottom line it is recommended that you examine the cost of customer acquisition as a key performance … Retailing costs Potentially a retailer in a high traffic location could allocate a proportion of its rental costs to customer acquisition. Calculated as sales and marketing expenses divided by the number of new customers, a thorough understanding of CAC can help improve a company’s marketing return on investment, profitability, and … How to calculate Customer Acquisition Cost This is a particular problem for bricks and mortar businesses, who don't always know when a customer first walked in and how many times they'll subsequently visit (see the Starbucks example above). It should generally include things like: advertising costs, the salary of your marketers, the costs of your salespeople, etc., divided by the number of customers acquired. 3. For example, if a business spent $100 and acquired 2 customers, their customer acquisition cost (CAC) is … Customer … Customer acquisition cost formula. This figure includes sales and marketing costs such as advertising, salaries, commissions, bonuses etc. If you're selling cars, it could be three months between someone seeing your ads and finally buying the car. In this fantastic PDF file, Kissmetrics and Avinash Kaushik have broken down the LTV calculation using Starbucks as an example. Cost of acquisition also includes the expenses occurred in attaining a sale or a customer. At a number higher than three, there's probably room to grow, by investing in more marketing channels. 20-22 Wenlock Road London, N1 7GU United Kingdom, Nickelled Ltd © 2014-2020 Terms & Policies, Include all non-publisher spend: CRM, social media management, mailing list software, etc etc, Include other spend such as agency fees, but do not include billed publisher spend if already included in question 3. Obviously if it costs $100 to acquire a customer to your website who only spends $40 during their lifetime then you are losing money. But listen, customer acquisition cost (from here, 'CAC,' because let's face it, it's a mouthful...) is one of the most critical metrics out there. That's a far better way to improve CAC than by cutting marketing spend by 16%. Metrics to other businesses of your sales and marketing costs such as,. That $ 25,000 on newspaper ads every week report as soon as 've... 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