Customer Acquisition Cost – commonly referred to as CAC which refers to all of the resources a business must allocate (including but not limited to financial and time) in order to acquire a customer. (Source: Wikipedia)
Simple enough right?
We previously touched on new customer acquisition costs in an earlier blog post. It goes hand-in-hand with what we’re talking about here. Be sure to give it a quick look and then come right back here to finish reading this blog post. Got it?
Recommended Reading: New Customer Acquisition Costs
Now that we have defined what customer acquisition cost is and before we get into the “meat” here in this blog post today, you first need a reason as to why you should keep reading.
So, why should you keep reading, rather than click the back button?
- We’re going to go through all applicable fees associated with customer acquisition cost, so you know your numbers cold, which leads to a greater ROI – return-on-investment.
Sound good to you?
How do you calculate your customer acquisition cost?
Before we talk about that we need to explore what goes into your customer acquisition cost. It does not matter what your customer acquisition plan is made of, you will have all of these costs and/or a variation of them.
What types of costs do you incur for new customer acquisition?
- Rent/lease payments.
- Property taxes
- Utilities – gas, electric, water, sewer.
- Marketing materials
- Employee salaries
- Sales commissions
- Shipping costs
- Manufacturing costs for your product
Did I leave any costs out?
If I did feel free to let me know, but I think that I have covered a majority of them.
Why have I included costs such as utilities, rent/lease payments, manufacturing costs?
All of these costs are associated with customer acquisition.
[tweet_box design=”default” float=”none”]You need to account for every last red cent when trying to determine what your customer acquisition cost is![/tweet_box]
This will allow you to maximize your return-on-investment.
If you know your customer acquisition costs down to the penny, it allows you to determine, ultimately what the cost of your product/service should be in order for you to achieve the profit projections you set for the year.
I would conduct an audit on a quarterly basis to make sure you’re charging enough for your product/service.
Do you know your customer acquisition costs down to the penny?
I bet you don’t, but you better start right now and figure that out! Otherwise you’re more than likely throwing money away which reduces return-on-investment, and decreases profitability.
You don’t want to decrease profitability do you?
I didn’t think so.
Typically there is a ratio or formula you use to determine your customer acquisition costs.
Total Sum of All Expenditures/# Of Customers
Here we go.
All of the dollar amounts of the above discussed costs are going to be monthly amounts as referenced below.
- Rent/lease payments – $1,000
- Property taxes – $500
- Utilities – gas, electric, water, sewer – $100 (combination of all 4 utilities)
- Marketing – $300
- Phone – $25
- Internet – $40
- Marketing materials – $100
- Employee salaries – $5,000
- Sales commissions – 5% per sale
- Shipping costs – $50
- Manufacturing costs for your product – $25
All that is left to do now is add them up.
So, get your calculator out and add them up. Oh, I forgot something.
What is meant by 5% per sale commission?
5% of what?
What is the cost of your product?
$2,000 is the cost of your product.
What is 5% of $2,000?
For every sale you need to pay your sales associate(s) $100 in commissions.
$1,000+$500+$100+$300+$25+$40+$100+$5,000+$100+$50+$25 = $7,240
Your customer acquisition cost is $7,240 per month.
What are your thoughts?
As you can clearly see customer acquisition costs are more than just what you spend on marketing.
It is all of the costs involved in acquiring a customer.
These costs are relatively fixed on a monthly basis save for the commission dollars you may have to pay out per sale.
Before we roll on I wanted to let you know we discussed in detail what your customer acquisition costs are if you’re using the internet as a vehicle to generate leads, that you convert into customers.
It is related to this conversation here. So stop reading and check it out. Be sure to come right back!
Recommended Reading: Customer Acquisition Cost Online
After doing the math and knowing what your customer acquisition cost is now. How do you use this information?
To maximize your return-on-investment as it relates to your customer acquisition plan
What do I mean by that?
We’ve already talked about how to calculate your customer acquisition cost and what that number is on a monthly basis.
In case you have short-term memory loss that number is $7,240
How many customers do you need to break even?
If you recall the cost of your product is $2,000.
Therefore 1 customer is worth $2,000.
So you need 4 customers to break even.
$2,000 x 4 = $8,000
It’s up to you how much profit you want to make.
Also, what are your market conditions?
What is a reasonable number of new customers you can acquire in a month’s time?
By knowing your customer acquisition costs to the last penny, allows you to just go out there and execute. Get to work and bring in the new business!
Will situations arise in any given month that may alter that number?
Of course, but that is an easy adjustment to make.
What else does this do for your business?
It provides you with clarity.
When you have clarity, you can really hone in on the goal of acquiring new customers and not let anything get in the way of that.
Are you picking up what I am putting down?
That’s it in a nutshell on how do you calculate customer acquisition cost to maximize ROI.
Do you have a customer acquisition process in place for your business?
Is that process working?
Is that process efficient?
Is that process cost-effective for your business?
If you could improve that process would you?
Do you need help in figuring out which parts of your process should stay or go?
If you’re answering “Yes” to all of these questions then my hats off to you. Business must be awesome!
Otherwise you and I should talk. Let’s see how I can get you to where you want to be.