How Do to Calculate Your Customer Acquisition Cost?
The cost of customer acquisition or the customer acquisition cost (CAC or CoCA) refers to the price that you pay in order to acquire a new customer.
To understand if your marketing and conversion strategy is working you need to know how to calculate cost of customer acquisition.
Customer acquisition cost for your e-commerce business is worked out in two different ways, the simple way and the complex way.
To attain it in the simplest form, it is worked out as:
Dividing the total costs associated by total new customers, within a specified time period.
A brand that uses the above formula is easily able to calculate their lifetime customer acquisition cost. There is, however, a strong distinction between the above metric and cost per action (CPA), and the two should not be confused.
In e-commerce, CPA refers to the amount you pay to convert a customer (that is to make a sale) both new and returning customers. CAC, on the other hand, is all about acquiring new customers.
Search engine Google even refers to CPA as the cost that you are willing to pay to make a conversion NOT to acquire a new customer.
The customer acquisition cost is one of the most important metrics for any e-commerce store; this is along with the lifetime value of a customer.
This is because your store needs to make money which therefore means that you need to get a return on investment ROI from your marketing and sales campaigns.
Therefore, the ratio to focus on is the one that will reveal how much value you are reaping from your customers in relation to how much t costs to acquire them. Take a ratio:
Simply your business will fail if your CAC is higher than your LTV. Let us go through some ratios in regards to the LTV: CAC
Less than 1:1 – this means you are on the verge of oblivion, fast
1:1 –means that you are losing money from each of your acquisition
3:1 _this is the perfect level. You have a thriving business and a solid business model
4:1- this is great but you are under-investing and could be growing faster. You need to start more aggressive campaigns to acquire customers in order o bring your ratio closer to 3:1.
As such you need CAC to assess how your marketing campaigns perform. The goal is to find marketing channels that have both a high LTV: CAC ratio and are scalable.
It is useless to only focus all your time on channels that send a very small amount of customers. Also find the right balance between time and effort, LTV: CAC and quantity of customers acquired.
There Are Two Key Reasons Why Customer Acquisition Cost Is Important:
1. Working out your LTV: CAC ratio, as well as the months required to recover your CAC, helps you analyze the overall success of your business.
Figuring out the time needed to acquire CoCA is quite useful to establish how strong your business model is.
It is pointless for it to take you three years to recover your initial investments as you need to reinvest that money. A better target would be to aim for anything less than 12 months.
2. CAC helps also to optimize your marketing campaigns and channels. What channels and campaigns have the best LTV: CAC RATO?
Where are you getting your best customers from? Keep in mind that cost of customer acquisition for different campaigns vary. They change all the time and you must be keen in that when you stop getting an ROI you need to stop the investment.
The complex way of calculating customer acquisition cost entails more variables but it is the most accurate way.
If you need to analyze the cost of acquisition on a campaign basis, then you need to start attributing things such as the proportion of time spent on particular campaigns in order to work out the corresponding wages.
Calculating your brand’s customer acquisition allows you to assess their acquisition spending at the most granular level on a per customer basis.
This is attained by dividing the total amount spent on customer acquisition by the total number of customers acquired.
How do you attribute the campaign cost associated with the acquisition?
Calculating this requires that you split the campaigns into the respective attracting and converting new customers to give you the total cost associated with the acquisition from that campaign.
How do You Improve Your Customer Acquisition Cost?
In order to improve and optimize your CAC you should try methods such as improving on-site conversion, messaging in campaigns, targeting in your campaigns (always focus on customers with the best LTV: CAC ratio and explore new, potentially more profitable channels.
Also, consider calculating the following:
1. Your cost per visit by channel
2. Your visit –to-purchase rate by channel
3. The average value of customers converted from a particular channel. Keep in mind that you can also afford to have a higher NCAC for customers with a higher LTV
Calculation of CAC should be properly understood by any brand that is looking to grow their business.
Calculating your brand’s customer s acquisition allows you to assess acquisition spending at the most granular level on a per customer basis.
This is attained by dividing the total amount spent on customer acquisition by the total number of customers acquired
Customer Acquisition Cost Starts With Sales And Marketing
CAC can provide a brand with lots of valuable insight into their day to day operations. For example, if your CAC keeps increasing from one period to the next then the cause could be either:
• The brand is investing more in acquisition without seeing a proportional increase in customer adoption or the brand is maintaining a constant acquisition spending as customers no longer sign on at the rates they used to.
Regardless, an increasing lifetime customer acquisition cost signals the need for a closer look at a brand’s acquisition strategy.
• Lifetime CAC helps us to understand acquisition costs from the most basic levels. It is a great tool for general tool analysis even though at times you might want to get a little more current.
In such instances, it is advisable to calculate CAC on a per period basis using the formula:
Customer Acquisition Cost Per Period Calculation
• Using the per period formula, you can calculate customer acquisitions based on time intervals that are most relevant to your business.
This formula helps your brand to collect acquisition information in ways that are easily summarized and included in time-based reports. It also helps to assess your business’s strategy of acquisition over the periods.
• In CAC trends, a decreasing lifetime CAC is less worrying but just as curious. If your brands lifetime CAC is dropping, you will want to know why.
If they are slashing the acquisition spent, customer adoption rates may not have dropped yet but could in the future.
Calculating the Cost of Customer Acquisition is the first step to understanding your business and understanding CAC is a crucial part of eventually having control of your business.
Whether it is a lifetime, per period or for an individual campaign your brand stands to gain a lot from a working knowledge of how much it costs to bring in a new customer.