Hooking new customers is an expensive pain point for many businesses. Your new customer acquisition cost (CAC) can be anywhere from five – 25 times as expensive as hanging onto your current buyers.
How much are you dishing out on marketing to potential customers? Is all that spending paying off?
To measure your efforts, you need to answer what is CAC, compare your rate to other businesses, know how to calculate customer acquisition cost, and reduce your rate if necessary.
What is customer acquisition cost?
Customer acquisition cost is how much a business spends marketing to and acquiring each new customer. Your CAC includes the money you devote to sourcing leads and turning them into customers.
Generally, your customer acquisition cost will be made up of three components:
- Discounts offered
To determine how much customer acquisition costs you, add up your advertising expenses, losses from offering discounts, and how much you pay employees in marketing, sales, or similar positions.
Customer acquisition cost by industry
The average customer acquisition cost varies by industry. Here are a few examples of customer acquisition cost by industry, according to one source:
- Travel industry: $7 per customer
- Transportation industry: $98 per customer
- Retail industry: $10 per customer
- Financial industry: $175 per customer
In addition to industry, your marketing strategy, allocation of resources, and ability to cut unnecessary expenses also determine your customer acquisition cost.
To determine whether your CAC is too high or too low, you can also look beyond industry comparisons. Compare how much you spend on customers to how much you predict they will spend at your small business, known as the customer lifetime value (CLV).
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How to calculate customer acquisition cost
So, how do you figure out what new customer acquisition costs your small business? You need to learn how to calculate your small business’s CAC.
Use the following customer acquisition cost formula to calculate the expense:
Customer Acquisition Cost = Costs Devoted to Acquiring New Customers / Number of New Customers
To calculate your business’s CAC, choose a period, such as a month, quarter, or year. Then, add up your costs associated with acquiring new customers during the period. Divide your cost by the total number of new customers you acquired in the period.
Example of calculating CAC
Let’s say you want to calculate your customer acquisition cost for the quarter. During the quarter, you spent $5,000 on related employee salaries, $100 on an email marketing program, and $4,000 on social media ads. Add up these expenses to reach your total costs.
For the quarter, your total costs devoted to acquiring new customers were $9,100. And, you acquired 200 new customers.
Customer Acquisition Cost = $9,100 / 200
Customer Acquisition Cost = $45.50
During the quarter, you spent $45.50 acquiring each new customer. Depending on your industry and the average price of your goods or services, this CAC might be considered high or low.
How to reduce the cost of acquiring new customers
If you want to increase net profit (and who doesn’t?), you need to keep your cost of acquiring new customers low. To reduce your business’s CAC, improve your current customer acquisition strategy.
Take a look at these three ways you can lower your cost of acquiring new customers.
Measure your customer acquisition cost
You will have no way of knowing whether your customer acquisition cost is good or bad if you don’t measure it. And, you need to go further than measuring it once. Create a document (e.g., spreadsheet) that lists your customer acquisition cost per period.
Compare your CAC between periods to measure your efforts and improve your strategy. To come up with a killer customer acquisition strategy that keeps your costs low, don’t be afraid to experiment.
Acquiring new customers doesn’t have to be an expensive process. You can find less costly advertising alternatives that result in new customers.
Consider using customer cost saving ideas for the workplace, such as social media, email marketing, small business blog, and a refer-a-friend program.
If one method of acquiring customers has subpar results, cut it. Every business is different, and if one marketing strategy doesn’t work for you, focus on the ones that do.
You can try to determine how many new customers come from each marketing channel. For example, find your customer acquisition cost for LinkedIn and Facebook advertisements. If your customer acquisition cost is high for one of them, cut it.
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This article has been updated from its original publication date of December 4, 2018.
This is not intended as legal advice; for more information, please click here.