Driving the right balance between Customer Acquisition Cost (CAC) and Customer Lifetime Value can make or break your business. Are you keeping score?
Customer acquisition cost (CAC) can be calculated by dividing marketing expenses by the number of customers acquired in the period the marketing expenses were incurred. For example, if a company spent $1000 on marketing in a year and acquired 1000 customers in the same year, their CAC is $1.00. So simple right? Except for the fact that calculating the numbers for the calculation are a giant pain in the arse. So let’s break it down:
Marketing Expenses / New Customers Acquired = Customer Acquisition Cost
How to Calculate Marketing Expenses
Marketing expenses are not just the budget for ads or PR. They also include marketing oeprations. In 2016, if you spend $500 in marketing fees (website, ads) and 40 hours a month marketing. Let’s say you value your time at $50/hr. Then you combine $500 in marketing fees plus $2000 in marketing operations for a total expense of $2500 for marketing.
Common mistakes: Forgetting to include every single marketing cost you have. If you don’t include costs related to SEO, content marketing, lead scoring, data enrichment, web hosting, and similar, you are calculating an incorrect CAC. Oh you better be including marketing salaries, too!
How to Count Customers Acquired
In complicated business modeling, you look at returning vs. non-returning new customers, but we don’t like complicated. So let’s be conservative and assume that these are new customers (who might never return). For our story, I was able to acquire 100 new customers in 2016.
Let do the math:
- I spend $2500 for marketing expenses (tools/salaries/advertising/etc)
- I was able to get 100 new customers
- My cost per customer is $25 (aka customer acquisition cost)
How to use Customer Acquisition Cost
So is that good? Or bad? To be a company that can grow (and not takes out loan after loan to survive) your customer acquisition cost should be roughly 1/3 of your customer’s value. So how do you calculate your customer’s value? Check out my article on Customer Lifetime Value.