In my article on Why Most Small Businesses Fail, I’d say customer acquisition costs would fall under reason #9 “They don’t have a plan and they don’t stick to it”.  Customer acquisition costs is a highly important metric that shouldn’t be taken lightly on any business plan because it can SHUT A BUSINESS DOWN QUICKLY. If you’ve ever googled customer acquisition cost formula, you’ve probably found out that it looks pretty simple: All you have to do is divide the cost of sales and marketing by the number of newly acquired customers. Now, when it comes to the question of how to calculate acquisition cost, we can say that it is dependent on two of the most important factors. Snag our template and get very clear about where your business is, and where it's going. One metric that can put entrepreneurs out of business very quickly is customer acquisition cost, and surprisingly many don’t know what it is or how to calculate it. Now, that you know your expenses and how many customers you’ve acquired, now you want to take your expenses and divide them by the number of customers. Here at How to Entrepreneur, our focus is on helping you start or grow a business from idea to full-time income, and from full-time income to enterprise. After you’ve finished checking out the article below, we invite you to learn more about how we can help here. If you make $0 from SEO efforts, you have to make up for it by getting income to pay your bills from somewhere, therefore, there’s an inerrant labor cost.  What do you want to be paid monthly?  Your labor costs is a cost. How to Calculate Your Customer Acquisition Cost (CAC). Customer Acquisition Cost: How to track it and calculate it The backbone of Slidebean's growth has diligently and accurately tracking our customer acquisition costs. So for May, that’d be dividing $71,375 by … The calculator calculates three CAC ratios. From my experience, PPC is a significantly quicker path to results like traffic, but it’s also a significantly faster route to business shutdown IF customer acquisition costs are not measured closely. Other companies send out a trial offer or Udemy does an amazing job with increasing the frequency of purchase with their sales.  Sometimes, they offer sales where you get a discount when you buy more than one course.  They have a “often purchased together” prompt, they do retargeting, and send out discounts if they haven’t seen you for awhile. Going back to our example, if it costs $4 to get a customer, then your lifetime customer value has to be more than $4.00 for you to have a viable business model. How to Calculate Customer Acquisition Cost. If you thought this content was helpful, share it with friends and family that can benefit from it. First, determine the cost of sales. Calculate the average monthly cost of promotions. Suppose a company spent $ 50 in sales and marketing in a certain month, if in that same month they acquired 10 new customers, calculate the company’s CAC. An easy way they increase the value of each sale is by having the burger and the combo.  The burger may seem like a low price and may have a low-profit margin, but they can make up for the thin margins by asking you, “Would you like a fry and drink with that?”.  When you say, “Sure”. However, these things take time and money, and often times the people who are making blog posts saying these are good tactics to try are not adding in all of the costs: time, money, and energy.  They are flashing tactics as if they’re easy when they all require work. then they’ve instantly increased the value of the sale. This figure includes sales and marketing costs such as advertising, salaries, commissions, bonuses etc. The Correlation of Customer Acquisition Cost and Lifetime Customer Value, Final Words on How to Calculate Customer Acquisition Cost. Below, we'll highlight how to calculate your restaurant's customer acquisition cost, why it's so important, and what you can do to make your customer acquisition efforts count. When customers come with questions or concerns about the product or service, they need to have someone to contact.  Customer service helps clear the air of important concerns.  They also address payment issues, questions, complaints, and feedback.  Customer service is a component that needs to be scaled as marketing does. 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 profit margin. In addition to increasing engagement, creating a process to acquire referrals takes guerilla marketing up several notches, and large companies know this.  You can ask customers if they have friends or family who would appreciate your service, you can create an affiliate program, or you can reward customers for sharing your product or service. I'm a Mom, Wife, Military Veteran, and the Founder of How to Entrepreneur. Many business fail because they aren't organized with a crystal clear plan. 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. Customer acquisition cost is the amount spent to acquire a new customer. When this sales and marketing cost is combined with your gross profit number for the same period, you can calculate an important ratio: the CAC ratio . It also helps it to calculate the resulting ROI of an acquisition. Maybe 100% of the traffic to your website or store doesn’t convert into a sale right away, but if you use email marketing, you can increase the customer acquisition or retention by adding them onto your email list.  Email could be a viable cost for you. We’re so happy to have you! Now, you have the expenses clear, and it’s now time to figure out the return on your investments.  After all of that money was spent, how many customers did you get in return? You don’t want to do like I did and send all traffic to informational posts.  Instead, you have to have a ratio of “money pages” also.  These “money pages” can be: Regardless of which option you choose for your money pages, you’ll have costs: A nice option for getting new customers on board is to collaborate with influencers, entrepreneurs, and bloggers in exchage for a percentage of the sale.  When you have affiliates, they have to recieve a commission or payout of some sort.  Commission payouts are a cost. SEO takes time.  Many people like to think of content marketing and SEO as “organic” or free, but that’s an absolute myth.  There’s web hosting, training, plugins, and labor that costs. Research shows that most businesses fail within the first 5 years, and that statistic has held true for a long time. with FunnelAds Fix, Finally, Hand off the Work of Getting a Sales Funnel Built Online with Ignite, How to Start a Product Review Blog [2021] – A Step-by-Step Guide, How to Start a Food Blog [2020] – A Step-by-Step Guide, Sales pages for your products or services, Software like Thrive Themes (which I highly recommend) that gives you. You can calculate how many customers you have by looking at your CRM software, checking out your Paypal account, or many people use Stripe.  However you manage your buyers or commissions is where you would want to look to see how many customers you acquired. But, if your company has a longer sales cycle, i.e. 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. Content marketing takes an average of 6 months to see results even if you’re blogging daily (more than 1500 word posts) like I’ve done here.  You have to let the content incubate after you’ve created it.  Your site has to mature.  You have to establish a trustworthy presence on the search engines and in the market.  All factors that make content marketing work take time. How to calculate customer acquisition cost? Divide your costs by the total number of new clients and there you have it – your customer acquisition cost. How to Calculate Straight Line Depreciation. Ready to Take the Next Step to Grow Your Business? Add all the monthly costs and divide by the number of new customers per month. We know how the business journey can be, and we want to help you grow your business confidently, and with clarity. To reduce your CAC, you need to first calculate it. How you calculate your total sales and marketing costs will vary depending on your type of company. To calculate the Customer Acquisition Cost add up total expenses related to sales and marketing activities and divide that by the number of new customers signed. Required fields are marked *. Some costs can sneak up on us, so you may want to use your accounting software or bank statements to accurately gather the costs you have. Instead, their customer lifetime value may be well over $100 because most customers think of McDonald’s as a non-threatening, low risk purchase.  People buy McDonald’s over and over even when they’re broke! ).  CREATE YOUR FREE ACCOUNT NOW! To calculate customer acquisition cost, you simply divide the total expenses associated with acquiring customers by the total number of customers that your business has acquired over a certain period. ), your lead generation(labor–even your labor has a cost!–automation software, web hosting, paid advertising, keyword research tools, training, etc. For companies with a short sales cycle, this formula works great. Now, your goal for your lifetime customer value has to take into account that most of your “leads” do not become “paying customers”, and the paying customers have to pay for your business expenses and leave profit. Now to the meat and potatoes of the article…. This metric is very important as it helps a company calculate how important a customer is to it. Customer Acquisition is a process or a transition phase, from the point where a potential customer notices your company and your product/service to the point where he actually makes a purchase. Help others start or grow their businesses. This includes online and offline promotions that are one time or continuous. Not long ago, I received a card in the mail from my chiropractor with a complimentary adjustment for my birthday.  I thought it was a genius way to increase the frequency of purchase. In summary, everything costs, and in order to get out of the startup phase and to scale as a viable business model, you have to manage the costs by first clearly knowing what they are. The basic and notoriously bad formula for calculating customer acquisition cost is to add up the amount you spent on your marketing campaign and divide that by the number of customers you acquire. 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. How to calculate Customer Acquisition Cost (CAC) Calculating your brand’s customer acquisition cost allows you to assess their acquisition spending at the most granular level on a per customer basis. Acquisition Cost (Customers) = Total Acquisition Cost / Total No. Take the total acquisition spend and divide it by the number of customers acquired. They make each acquired customer worth the price.  In my article on Customer Journey Mapping, I talked about analyzing your 7 business systems and analyzing pain points and opportunities to grow the relationship.  To improve lifetime customer value you want to find: Jay Abraham recommends two ways to increase customers without adding onto acquisition costs.  He says you should increase customer retention and increase referrals. My mission is to help you grow your business: from idea to full-time income, and from full-time income to enterprise. Customer Acquisition Cost (CAC) is the total cost of sales and marketing efforts that are needed to acquire a customer. The goal of this article was to show you how to calculate customer acquisition cost.  If you’ve calculated it, and you’re off balance, don’t worry, just take note.  Focus on increasing the lifetime customer value by getting more customers (either thru increasing retention or using a proven marketing method), increasing the frequency of purchase, or increasing the value of each sale. Once you know the overheads and costs that are involved with acquiring new customers, you can focus on improving your processes, closing procedures, or outreach initiatives to reduce those costs. Even the cheapest perceived marketing tactics can add up in costs quickly.  For example, alot of the “hoopla” is about content marketing, PPC, and Facebook ads nowadays. It’s likely that if you’re here, you’re looking for a way to, Your email address will not be published. Customer acquisition cost (CAC) is the amount of money you spend on sales and marketing to acquire a subscriber. Calculate the Acquisition Cost. Anything Else Required for Marketing or Client Fulfillment. Time to bust out those calculators. The customer acquisition cost (CAC) must be looked at relative to the lifetime value (LTV) of the customer acquired, and the time it takes to recover the costs, known as the payback period. If you liked what you saw here and you’d like to start or scale a business online CLICK HERE AND CREATE YOUR FREE ACCOUNT!  Get two free websites, ten free training lessons, and access to a community of 1 million+ entrepreneurs (many who are making major things happen online! You have to get your 7 systems set up: the lead generation system, the lead conversion system, the client fulfillment system, the branding system, the job prototypes, the branding system, the management system, and the leadership system. ), your lead conversion (optins, landing pages, labor costs, and email marketing), the branding system (logos, brand style guides, and time to build trust), and we can go on. most businesses fail within the first 5 years, several “business ventures” I’ve taken a shot at, How to Start a Dog Treat Business [2020] – A Step-by-Step Guide, How to Start a Cell Phone Repair Business – A Step-by-Step Guide, ThriveCart Review [2020]: Pros, Cons, and Alternatives, Snag the Startup Entrepreneur's Toolkit - Learn how to Get Consistent Sales Online, Let's Troubleshoot your Online Sales Problems Live! Divide the total number of new customers over that same period customers month! First 5 years, and we want to help you grow your business is measure! 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