Customer acquisition cost

Customer acquisition cost is a measure used in marketing to determine the average total cost of acquiring new customers for a business.

Customer acquisition cost

In other words, this indicator reflects the investment that must be made to make a potential customer become an effective customer.

For starters, this calculation can help a business decide how much to invest to acquire new customers. This, with the purpose that the investment is profitable for the firm and that financial resources are not used inappropriately.

Additionally, this measure is known by the acronym CAC and when calculated it helps companies know how much money they need to invest to get new customers. All companies hope to reduce their cost of customer acquisition. This allows them to recoup the investment used in marketing and sales. In addition, the company can know how efficient and adequate are the marketing and sales programs that are being implemented.

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What is the cost of customer acquisition?

How to calculate it?

To calculate the cost of customer acquisition, the following formula is used:

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Customer acquisition cost formula

In this case, the sales and marketing expense represents the sum of the costs of:

  • Sales administration.
  • The amount of wages.
  • The payment of commissions and bonuses.
  • General expenses of the period considered. This can be a month, a quarter, or a year.

The NC represents the number of new customers acquired during a month, a quarter or a year.

For example, if a company has the following expenses:

Sales management = $ 55,000.00

Salaries = $ 30,000.00

Commissions and bonuses = $ 10,000.00

General expenses for the period = $ 40,000.00

Total = $ 135,000.00

With this investment, the company managed to get 50 new clients during the estimated period.

So when applying the formula we get:

CAC = 135,000 / 50 = $ 2,700.00

Therefore, the average cost of acquiring customers for this company is $ 2,700.00.

Analysis of the result

First of all, it must be clarified that all companies and all products have a different CAC. Not all of these measurements are the same. Nor does it imply that having a high CAC is a bad thing. Above all, if we are analyzing it in the short term. It could happen that the CAC may go down in the medium and long term. What is important is to try to reduce the CAC measure. This, to achieve better levels of profitability and efficiency in the marketing and sales processes of the company.

Why is it important to do this measurement?

For a company it is very important to carry out this measurement or marketing metric because:

1. Show return on investment

First, the CAC measurement helps companies to pinpoint how the return on investment is occurring. This is very important because it allows you to know if financial resources are being used properly in the field of marketing and sales. Especially in the application of strategies of the process of attracting new clients.

2. Determine the effectiveness of the plans and the execution of marketing strategies

Second, the effectiveness of marketing plans and execution defines how many leads become effective. Therefore, this measurement (CAC) tells us how much we are spending or what is the cost to convert them into customers who buy the products. This will be due to how good the strategies are being used.

It is important to note that people prefer to go through their purchase process alone. Only when they do not find the information they expected do they contact the experts. Therefore, you must be attentive when contacting new customer prospects.

3. It allows to better focus resources

Third, this measurement allows you to establish in which phase of the marketing process you should invest more resources to achieve better results. Therefore, concentrating resources where they are best used will lead to better results.

4. Helps to improve and add value

Finally, the customer acquisition cost measure helps to improve what is being done and add value. Therefore, the strategies that are being implemented can be modified. For example, make a better price match and develop better value-added products. All this contributes to the company offering a better service.

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Customer acquisition cost
Why is it important to measure it?

As a conclusion, it can be said that the cost of acquiring customers for a company should be a measure to be calculated periodically. This, because it helps you to know what results the investments in marketing and sales are generating to add new clients, which finally allows the company to stay in the market. But, most importantly, with the acquisition of new customers the company can grow more.