Customer Acquisition Cost
Are you spending enough energy on marketing? are you using that energy effectively?
Customer Acquisition Cost (CAC) is a critical metric for any business. It helps you understand the cost of acquiring a new customer, which in turn helps assess the efficiency of your marketing efforts and informs your growth strategies.
Here's a comprehensive breakdown of establishing CAC, taking into account both direct and indirect costs.
Direct Costs
Direct costs are the most obvious expenses associated with customer acquisition. They are directly attributable to marketing and sales activities, and they might include:
Advertising Costs: This includes the money spent on advertising campaigns across different channels like Google Ads, Facebook Ads, Instagram Ads, etc.
Marketing Team Salaries: The salaries of the team members who are directly involved in marketing activities. This includes marketing managers, content creators, SEO specialists, etc.
Sales Team Salaries: The salaries of the team members who are directly involved in the sales process. This includes sales representatives, sales managers, etc.
Marketing & Sales Software: This includes the cost of tools and software used by the marketing and sales teams. Examples might include CRM systems, email marketing software, analytics tools, etc.
Indirect Costs
Indirect costs can be harder to quantify, but they are just as important for a complete picture of your CAC. Indirect costs might include:
Overhead Costs: This includes a portion of the rent, utilities, office supplies, and other general expenses that support your marketing and sales teams.
Training Costs: The cost of training your marketing and sales teams, including the cost of courses, workshops, and other learning resources.
Time: The time spent by your team on marketing and sales activities can be a significant cost. This includes time spent on strategy development, campaign management, meetings, etc.
Calculation
Once you've identified all of these costs, you can calculate your CAC using the following formula:
CAC = (Total Direct Costs + Total Indirect Costs) / Number of Customers Acquired
For example, if your total direct and indirect costs for a month are $10,000, and you acquired 50 new customers during that month, your CAC would be $10,000 / 50 = $200.
This means that, on average, you spent $200 to acquire each new customer.
Attribution
It's also important to have a system for attributing new customers to your marketing efforts. This can be complex, as customers often interact with multiple marketing touchpoints before making a purchase.
You might choose to use a simple attribution model (like last-click or first-click), or a more complex model (like linear, time-decay, or data-driven). The best choice depends on your business and your marketing activities.
By accurately calculating your CAC and attributing new customers to your marketing efforts, you can gain a clear understanding of the return on your marketing investment, and make more informed decisions about how to allocate your marketing budget.
The time it takes for S&M expenditure to turn into new revenues is reflected in the lag.
Depending on the length of the sales cycle, a longer or shorter lag may be acceptable.
Calculation
Money spend on marketing / New Customers gained from Marketing.
Money: Advertising + Labour Cost of producing content
Related calculations include:
Decision Triggers
Outcomes and Consequences
| Result | Decision |
|---|---|
| Failure | Strategy or execution? |
| Success | Expand bet or reduce costs? |
Dimensions
- Time
- Service Type
Time
- Quarterly
- Yearly
Other
- Service Type
- Service Provider
- Revenue Stream