What’s Your Customer Acquisition Cost?
Way back in the 19th century, an Italian economist, Vilfredo Pareto came up with a rule that can apply to any possible phenomenon under the Sun, The Pareto principle:
‘20% of the effort generally yields 80% of the results.’
Do you consider this principle when planning your lead generation strategies?
What is your 20%?
It’s probably not a surprise that calculating your Customer Acquisition Cost is one of the most important business performance metrics. CAC is a crucial Key Performance Indicator (KPI) that must be a part of your 20% highest yielding efforts.
Customer Acquisition Cost, as you know, is the cost of convincing a potential customer to buy a product or service. So, without wasting a single minute, let’s understand the customer acquisition formula.
Simply put, CAC can be calculated by dividing all the costs spent to acquire more customers by the number of customers acquired during the same period. The total cost that is to be divided must ideally include:
So the formula for CAC is:
Customer Acquisition Cost (CAC) = Cost spent on sales and marketing + Salaries / Number of new customers acquired
For example, if a business spends $5,000 on marketing in a year and acquires 100 customers in the same year, their CAC is $50.
This amount varies widely according to industries. For B2B companies, it may be higher than $300 per new client. Or CAC can be as lower than $10 for travel companies. Here are a few Customer Acquisition Cost averages by industry.
Is your CAC somewhere near the figures mentioned above?
Yes? No? Not sure?
Calculating an accurate CAC is a strenuous task. Many business owners are confused and wonder which marketing and sales expenses that they should include.
If I include every little penny spent on my marketing efforts, my CAC will be high and make my profits look bad.
If I exclude the details, my CAC might reduce to a certain extent, and profits look better but will those be the correct figures? Will they prove beneficial in the long run?
We have a comprehensive list what should be included in the total sales and marketing spend. It clears the confusion while still giving you accurate figures. Look for a little surprise at the end. You can thank us later!
The amount spent on sales and marketing collectively should include the following costs:
Digital and Traditional Advertising
Social Media Marketing
All of these three major categories will help you capture the costs spent on sales and marketing. Make sure that you include all the relevant fields and at the same time, do not repeat any.
And last but not the least, add the salaries plus expenses of your sales and marketing teams. You can include as many factors you think relevant. It is your preferences to decide the amounts you add in these calculations. Here is a list:
Employee Overhead Costs
The aim of these calculations is not reducing the CAC for temporary satisfaction but to get the actual, clear picture of your investment and return percentage.
Let’s simplify your life a bit more!
After all these statistics and calculations, it is not an exaggeration that reduction in Customer Acquisition Cost is one of the most important KPIs for your business. So, in the last and most important blog of this series, were we talk about how Convirza helps reduce your customer acquisition costs. Click here to learn 1 Simple Way for Reducing Customer Acquisition Cost.