Customer Acquisition Cost (CAC), as many other metrics belong in the modern marketing era. In the past, before digital, it was challenging for marketers and businesses to calculate the exact cost that was necessary to be spent to get a new customer through the door.
Now with all the new technological advancements, we can track the customer’s journey.
There are several different marketing channels that one could use to maximize their marketing efforts. Usually, to get the desired results and gain more customers, you need to combine them.
Search Engine Marketing(SEM)
Social Media Ads
These are some of the channels we use more frequently, but this list could go on.
The problem is that we could only be sure of the last place that our customers visited before they converted and made a purchase. If we could understand how many blog posts or videos they had read before they finally purchased our product, we could minimize our costs by only using those specific channels.
But how can we calculate the Customer Acquisition Cost (CAC)?
A simple way to put it would be CAC = (amount of money spent on marketing & sales) / (amount of new customers). Let’s say we sell scientific books online, and in the last 12 months, we spent 3000$ on display ads, and we also have a professional blogger that writes blogs weekly, and they get $3,000/year, so our total costs would be $5,500. Furthermore, this last year we earned 1200 new customers.
CAC = $6,000 / 1,200 = $5, so for every new customer, we need to spend $5.
Our main goal, however, is to build long-lasting relationships with each customer, which means multiple purchases and, eventually, the constant flow of cash over the years. That’s where the customer lifetime value(CLV) comes in or, in other words, how many years you retain a customer. To calculate, it is necessary to know their purchase value and the frequency rate of their purchases, as well as the duration of your relationship with this customer.
Why is it so important?
First of all, knowing your CAC allows you to calculate your budget as a company better.
You can distribute salaries and the cost of tools by department more effectively.
You shouldn’t be looking at this as a cost but as an investment. I guess you have probably heard of the term ROI(return on investment). You make your yearly investments in marketing and sales, and then you wait for the return ~ the profit per new customer.
Keep in mind that some investments take longer to show their results, and that’s why you should have different variations when you calculate your CAC.
Another group of people that are very interested in your CAC is your potential investors. They need to have a clear view of where their money will go and when they will start making a profit.
The current business landscape is continually changing and evolving. A crucial factor is Covid-19, which won’t allow companies to keep growing at the same pace. Consumer trends are changing because different times mean different needs. It’s not a time to give up, but to keep on pushing, and to be honest, now is when you need metrics like this the most, so you can understand how to distribute your budget and human capital more effectively. Socioeconomic change is always a part of human history; however, marketing never stopped its efforts. As with everything else, it just changed its form.
At Zokoo, we can help you with your financial forecasting because we have a great team of MBAs and CFAs that bring results.
Are you ready to grow your business? Grow with Zokoo.