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Measuring your average Customer Acquisition Cost (also known as cost per acquisition), can not only transform your business results forever, but your entire way of thinking about marketing and sales! Let's discover how to calculate your CAC, so you can skyrocket your business sales and profit.
How do you calculate customer acquisition cost?
Average Customer Acquisition Cost is calculated as follows:
CAC = Total marketing and sales cost ÷ Total number of customers acquired
For example, if you spend $1,000 on ads in the local newspaper for the month, and you acquired 100 customers for the same month from your ads, your Customer acquisition cost is $10
Using the cost per acquisition formula from above, let's assume you put $1000 into an ad in the local newspaper to try to sell your product, and it generates, on average, 50 inquiries which cost $20 per inquiry. Of the 50 prospects that come in, 30 of them bought a widget. Your conversion rate is 60%. The average Customer Acquisition Cost for this marketing campaign is that each new customer costs you $33.33.(cost per acquisition)
Now let's say you're selling a product with a price of $100. 50% of this $100 is margin, what's left over after the cost of the product, to take the order, package, and processing the sale through the system. So your profit on a sale is $50;
You already know that your Acquisition Cost per customer is $33.33. You also know from your sales records that each customer spends on average $100, and that your average profit margin is $50. All this tells you that for every $33.33 you invest you make $50!
Now you know how much it costs to buy a customer, and how much you profit from every sale. With this information, you can figure out exactly what to do, and how many customers to buy to earn the profit you want.
What is customer acquisition cost?
Average customer acquisition cost can be defined as the total cost for acquiring a customer. This includes the total marketing, advertising and sales-related cost associated with convincing a consumer to buy your product or service. It is very similar to cost per lead. This can be considered as the cost for buying a customer.
Yes, buying a customer! This new strategic approach to “find more customers for your business" will not only transform your business results forever but change the entire way of thinking about business! Now you can buy as many customers as your business will ever want.
All you need to do is calculate the value of your leads. This probably one of the most untapped areas of potential revenue, profit and growth. "Lead value" can be classified as, "how much" every Lead (potential customers) is worth to you in revenue or profit. For example: "revenue per lead", or "profit per lead" The word "Leads" refers to a person that gave you their contact detail because they showed some interest in your product or service.
This means you can buy as many customers as you want, as long as you know how much they cost you and how much profit you earn from a customer. Every customer costs you money and out of the experience, we know that you normally, will not recover your marketing cost from the first sale.
I've met many business owners who don't have much clue as to what Customer Acquisition Cost is, much less its importance and the impact it has on their bottom line. A fatal mistake for many businesses, but it's also the reality is many of them focus on increasing revenue by continuously acquiring new one-shot customers.
“Make sure that every one of your customers is profitable”.
What is a good and healthy CAC ratio
This is no easy answer because it will differ for every business and industry. But If you're a wise business owner, you'll understand that every cent you invest in advertising is going towards acquiring new customers. You'll also realize that it cost you 6 times more to attract a new customer.
That's why you just can't afford to lose them once you've acquired them. It is also why you should start shifting your focus to increasing your Customer Lifetime Value because its one of the keys to the success of your business. It'll allow you to acquire more customers than your competition through better and more attractive offers; it'll dramatically increase your bottom line through more repeat sales and shoot your profits through the roof.
In some cases it may take 2 - 3 sales to cover your cost and only then you start making a profit. Now you can understand the importance of making sure your customer comes back, you need to recover the investment you made for buying the customer. That is where calculating your Customer Lifetime Value comes in.
While customer acquisition cost is important, it is secondary to your other efforts, which should be sales and profit-focused. If you are focusing on the customer acquisition cost as a driving metric, it may, in fact, harm your sales volume and profitability.
How You Can Improve CAC
The only way to do this is to consistently test, analyze and improve your results, because every little step brings you closer to the right formula to transform your business results forever, and skyrocket your business sales and profit.
To improve your customer acquisition cost (CAC) you need to:
- Keep on reducing the cost you pay for every new Lead. (CPL)
- Increase the value of your leads
- Focus on improving your Customer conversion rate. (CCR)
- Improve your Customer lifetime value, (CLV) by increasing Average transaction per customer and Transaction Frequency.
- Reduce your Customer retention rate, (CRR) to ensure your customer stays with you for as long as possible.
Using the calculator below will help you skyrocket your business sales and profit.
Calculating Return on Investment for Customer acquisition cost
Calculating ROI (Return on Investment) of your marketing campaign, involves looking at the total cost of your marketing, advertising, and sales campaign relative to the profit generated. This definition relates to the original definition of ROI as used by financial experts rather than marketing experts. Use one of the calculators below.
So, let's look at your ROI on your marketing for buying customers. To work out your ROI for investing $1000 on the campaign that sold 30 of your products at a profit of $50 each, at a total profit of $1500, we calculate it as follows.$1500 - $1000 =$500. This is the Return – $500 came back to you on your original marketing investment of $1000. Your Return on this Investment is $500/$1000 = 50%.
For more e-commerce, or on-site examples you can look at Neil Patel blog on customer acquisition-cost
Customer acquisition cost: Calculator
Use this free Excel "Customer acquisition cost" calculator to help you determine the cost and return on Investment from your marketing, advertising, and sales efforts. The Calculator can estimate "One Step" marketing a strategy, and a "Two Step" marketing a strategy
Now it's to you to make sure every customer is profitable.
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