Customer Acquisition Cost is one of the metrics that help determine if a business is on the right track, but…what exactly is CAC? Why is it a very useful tool? Keep reading, because I assure you that it is essential that you know it thoroughly.
In the following article we will talk about CAC, its importance and how to differentiate it from a metric with which it is often confused: LTV. Let’s go there.
What is CAC or Customer Acquisition Cost?
The Customer Acquisition Costor Customer Acquisition Cost, as it is known in Spanish, is a metric that helps determine the economic investment made to convert a in client.
A business can use CAC to find out if the customer attraction strategy is effective or profitable. The best examples of Cost of Customer Acquisition strive to decrease this investment.
To calculate CAC, it is vital that you have a accurate record of the sales process, especially the number of customers acquired per period. That way, accurate numbers will be obtained.
What expenses are included in the Acquisition Cost formula? Here are some of the most common costs:
- Marketing program expenses.
- Wages.
- Commissions.
- Bonuses.
- General expenses that are related to the conversion.
VIDEO | 5 tips to reduce your CAC or cost of acquisition and be more efficient
Why is CAC important in digital marketing?
Now that we have explained what the Acquisition Cost consists of, we are going to analyze its importance, because it is obvious to say that your business needs to make a profit, and the CAC metric allows you to know if you are achieving it.
The reasons for calculating the Customer Acquisition Cost are:
1. You know the efficiency of planning and applying strategies
To attract as many customers as possible, you need to devote a lot of resources to the process of planning and executing sales and conversion strategies. When you do the calculation of the Acquisition Cost you get to know if you are doing it correctly.
2. You use resources optimally
Customer conversion is made up of different stages, in all of which it is necessary to invest resources. The CAC calculation allows you to determine in which phase it is convenient to use a greater amount of resources.
3. You improve your business
Customer Acquisition Cost is one of the most relevant, because by calculating it you know if you should change strategies in order to improve the performance of your business.
In addition, it helps you set prices and even know what products and services you should offer your customers.
4. You know the return on investment
Thanks to the CAC you have the opportunity to know exactly the performance of strategies focused on sales and marketing.
The information you obtain with this metric is real, since it is a true that are generated when applying the strategies of your business.
What is the CAC formula?
Here you have it:
Next, we specify the data you must know to apply it.
1. Marketing costs
This category includes all the investments you made to carry out marketing strategies. These costs are generated by studying the potential customer, or service that suits him and sell it.
The promotion of the products and services of your business are an important part of marketing costs. When you calculate the CACyou will know what your return on investment is and if you should keep the expenses applied to marketing.
2. Cost of sales
They are made up of all the resources that are invested until the product or service reaches the end customer. This kind of cost is very common in manufacturing brands, where material, production and storage are paid.
In addition, sales costs exist in e-commerce, they also require a team focused on the sales process. This is responsible for analyzing the opportunities that the business has to sell.
The costs of sales include all those that were aimed at capturing leads, so it is possible to include the used in digital campaigns.
When you add the marketing and sales expenses, you get the value of the campaign, the latter being the one used in the CAC formula. Some of the investments that can be included in it are the following:
- Acquisition of tools.
- Advice from different specialists.
- Sales commissions.
- Buy ads.
- Employee training.
- printed materials.
- Participation in events.
- Salaries.
- Software subscription.
3. Number of customers acquired
As indicated by the formula specified above, the total result of adding the cost of sales is divided by the number of customers that have been acquired. This must be centered on a period, it can be a week, month or year.
Because the need exact data, it is very important that your customer record is clear.
It is always relevant to clarify that the number of customers includes those acquired through marketing and sales campaigns. As for the most recommended period for the calculation, it is monthly, but you decide what is most convenient.
How to calculate the cost of customer acquisition?
To understand what CAC is, it is essential that you learn how to calculate the Customer Acquisition Cost. Do not worry, it is a simple process, because the formulas that are applied are basic, you do not need to know complex mathematics.
You can do the calculation yourself or have the help of a specialist in sales analysis.
Now, taking into account the formula and the data that is included in it, we are going to explain the step by step to do the calculation effectively:
1. Add marketing and sales costs
The first thing is to know all the investments made in the process of attracting customers, that is, the costs of sales and marketing campaigns. Remember that they include salaries, bonuses, commissions, payment for advertising and more.
Once you know the total expense amounts, add them up. The total represents the campaign cost and is the first data required in the formula to calculate ACC marketing.
2. Select the period to evaluate
The period you decide to focus on can be weekly, monthly, bimonthly, quarterly, half-yearly and even annually. As we said before, it is best to do the calculation monthly, because, if you determine the CAC in your business each month, you will have the opportunity to apply improvements more quickly if necessary.
3. Identify the number of customers acquired by the business
Once the period to be evaluated has been selected, determine how many clients you managed to acquire in it. You will find this information in your records, which, as we said, must be accurate.
In case your business is digital or e-commerce, the data from the web page analytics will be necessary in this step. Through this information you will be able to know the following:
- Number of visits.
- leads.
- Number of buyers in a certain period.
4. Divide campaign spend by the number of customers acquired
When you know the information that makes up the formula for this metric, you can do the calculation. To obtain the Cost of Customer Acquisition, you must divide the cost of the campaign (marketing and sales) by the number of customers acquired.
It is a very simple step, you will only have to spend a few seconds, because you can use a calculator.
5. Interpret the result of the mathematical operation
The split result will show you how much your business is spending to acquire each new customer. How do you know if the result is profitable for you? It all depends on how much profit the client generates.
To know the profit that each client produces, it is necessary to know how much he buys in a certain period and how often he does it. The LTV or LifeTime Value, another of the most important, and will help you with this. We will talk about this metric later.
CAC or Customer Acquisition Cost calculation example
To make sure you fully understand what CAC is and how to calculate it, we will provide you with an example of Acquisition Cost. Take a look at how a business that sells clothing through the digital channel calculates its Cost of Customer Acquisition:
1. Campaign Cost Calculation
The first thing that anyone who is in charge of calculating the Acquisition Cost must do is know the amounts that make up the marketing and sales costs. Due to the fact that it is e-commerce, the expenses incurred are the following:
- Marketing team member salaries: they are the ones who study potential customers and are responsible for creating strategies to capture them. If this team consists of 4 people and each receives a monthly salary of $1,500, the total is $6,000.
- Payment to SEO specialist: To get the website to position itself organically and attract customers, someone specialized in SEO is required to create an effective positioning plan. The investment for the recruitment was $1,800 per month.
- digital advertising: The e-business decided to use digital media advertising to reach potential customers. When the payment of this and the specialist of Instagram and Google, $3,000 per month was invested.
If we add the specified amounts, the total is $10,800 per monththis is the amount that represents campaign spending.
2. Selection of the period to calculate
The e-business that sells clothes decided to do the calculation on a monthly basis, as it considers that it is the most convenient to ensure that it maintains a good CAC.
3. Identification of customers acquired in a month
According to the brand’s records, in one month 25 new customers were captured, all of whom have made more than one purchase.
4. Application of the formula to calculate the marketing CAC
Since the campaign spend must be divided by the number of customers acquired, the business applies the following formula:
CAC = $10,800 / 25
CAC = $432
5. Interpretation of the result
As you can see in the previous section, the cost of acquiring each new customer is $432. Is this convenient? If each customer makes total purchases in excess of this amount, the clothing store’s CAC is adequate.
What is the difference between CAC and LTV?
TheLifeTimeValue, or Customer Lifecycle Value is one of the most important business metrics. With it, it is known what is the value of the income from purchases of a client while maintaining a commercial relationship with a brand.
To calculate the LTV you need to know the following information:
1. Average value of purchases
To know it, you must divide the total amount of revenue from sales in a period by the number of purchases made.
2. Average frequency of purchases
The number of sales made in a given period is divided by the customers who made the purchases.
3. Customer value
It multiplies the (total customer purchases) divided by the frequency of their purchases. Although the result is lower than the CAC, it can still be convenient if the difference between…
Facebook Comments
Disqus