Customer acquisition cost is an important business metric that organizations and companies use to measure the value a clientele brings to their business. Customer acquisition cost (CAC) refers to the financial expenses of getting new customers to purchase a product or service. Much persuading and quality advertising are examples of expanding a customer base. Other costs involved in acquiring a single customer include product and labor costs.
Because getting a new customer to purchase a product or service requires money, as a business owner, you want to ensure that you also earn from each client, so your business is profitable. Your business model may not be viable if you spend more to acquire customers than customers spend on your business. If your business is starting, calculating customer acquisition costs is straightforward.
You can calculate customer acquisition costs by dividing the number of new customers by the total marketing spend. However, other costs go into your everyday operations that influence your actual customer acquisition cost besides the marketing cost. If you are categorically struggling with marketing, outsourcing customer acquisition service will help determine if your marketing is on track.
Key terms to understand when calculating your CAC
Cost of goods sold
Much goes in when it comes to product creation. From purchasing raw materials to labor and transportation, all these should be included in the cost of the sold products or goods. Simply put, the cost of goods sold is all the expenses directly involved in goods production. Indirect prices such as marketing and sales do not include the cost of goods sold. Including the cost of goods sold to your total marketing spend will help you accurately calculate your customer acquisition cost.
Average order value
The average order value is money spent each time a customer purchases a product in your store or places an online order. To calculate your business’s average order values, divide the total revenue by the number of orders or sales.
Gross profit or margin
Gross profit is the company’s total revenue after deducting the direct costs associated with goods production. High gross margins mean that you are retaining more income, a sign that you are running a profitable business. You can have profit margins as a percentage or a dollar value.
Determining CAC based on marketing costs
Marketing is often the bulk of customer acquisition costs, so you want to ensure that you get your marketing budget right, especially if you are a new business. However, the marketing budget is more flexible than the cost of other things like raw materials. With the right marketing strategy, you can lower your customer acquisition cost.
As a basic principle, you should not spend more than 5% to 8% of your total budget on marketing. However, how much you spend on marketing depends on your industry. Below is a list of the different sectors and how much they spend on marketing annually.
- Home and garden $6,988
- Health and beauty $4,939
- Furniture $12,980
- Food, beverage, tobacco $10,695
- Electronics and electronics accessories $12,156
- Fashion industry (clothing, shoes, accessories) $7,404
- Arts and entertainment $8,185
Because different industries have varying marketing costs, they also differ in customer acquisition costs. However, interpret these figures with caution because they vary significantly from brand to brand based on factors like average order value, team size, and target market.
The benefits of customer acquisition
With the appropriate customer acquisition strategies, your company grows and may also acquire the right customers cost-effectively. Each company or organization should focus on customer acquisition, specifically for new businesses or those with less established products. That is because a business just starting requires advertising, so much marketing is involved, which tends to be costly.
As a business grows and its products or services become popular among clients, the focus may shift to customer retention. Customer retention is less costly than customer acquisition, so the latter requires a thorough analysis of the associated benefits.
Quantifying the acquisition benefits helps a company accurately gauge the relative value of their customer acquisition process. Although attracting new customers may not be the priority for established companies, they need to find a way to satisfy and retain current customers.
A reasonable customer acquisition cost depends on your type of business and the industry you are in. You can keep the accounting jargon to a minimum by letting the professionals do their work.