Customer Acquisition Cost
Your customer acquisition cost is an important metric used to track your company’s success. It is the sum total of the amount that it takes your business to acquire a customer, including time from your sales representatives and marketing and advertising expenses.
Customer Acquisition Cost: What Is It?
Your customer acquisition cost is an important metric used to track your company's success. It is the sum total of the amount that it takes your business to acquire a customer, including time from your sales representatives and marketing and advertising expenses.
The customer acquisition cost definition: the total cost it takes to bring a customer from first contact to sale.
Of course, when you think about it, it can take a lot to acquire a customer: you may be running dozens of marketing campaigns, have multiple sales departments, and an array of revenue channels. Luckily, your customer acquisition cost formula is going to be comparatively simple: it's the amount that your company pays to acquire customers in total divided by the amount of new customers gained during that time.
If the combined efforts of your sales and marketing team, including any related advertising costs, is $5,000 a month, and you pull in 500 new customers every month, then the total cost of your customer acquisition is $10 per customer: it's that simple. The lower your acquisition cost, the better — and if your acquisition cost is very low compared to your customer revenue, scaling upwards may be a good option.
Tracking your customer acquisition cost tells you a lot about how your company is operating. If your customer acquisition cost is $100 but your average sale is $50, your business isn't sustainable; those acquisition costs need to be reduced. If your customer acquisition cost is $100 and your customer retention cost is $20, retention becomes very important. Likewise, if your customer acquisition cost is $100 and your customer retention cost is $150, your new customer acquisition is more important.
Over time, your customer acquisition cost will also tell you whether it's getting more difficult or easier to acquire new customers. You'll be able to look at trends to see when acquiring customers becomes more affordable, and if there are specific seasons during which customer acquisition is more expensive.
By using this data, you can optimize your acquisition strategies, and analyze the strength of your business overall. If your customer acquisition costs are going up, that's an indicator that your marketing and sales aren't effective. If your costs are going down, your current strategies are working.
Customer acquisition cost is closely related to other metrics, such as customer retention, customer lifetime value, and average purchase price. When used in conjunction with other metrics, you should be able to formulate a clear idea of how your company is doing.
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Customer Acquisition Cost Benchmarks
As with any metric, there are benchmarks to follow. If your organization wants to know whether it's doing well in terms of customer acquisition cost, it should look at customer acquisition cost by industry. A customer acquisition cost benchmark will tell a company whether it needs to improve.
What is a good customer acquisition cost? It depends on the scale of the business, the lifetime value of the customer, and the industry that the business is in. In real estate, the average customer acquisition cost is $213: a large amount, but the customer's lifetime value is very high.
In some industries, it's naturally more expensive to procure a customer than others. The more competitive your industry is, the more likely it will be that you'll need to spend a significant amount on your customer acquisition. You can compare your customer acquisition costs with companies of your size, companies in your area, and companies that are int he same industry.
If you need to reduce the costs of your company's acquisition, you will need to pay particular attention to the efficiency of your marketing and the productivity of your campaigns. Appropriate lead scoring is often the answer: rather than wasting employee time on chasing down poor leads, the company can instead score leads with the use of advanced, new technology, focusing on the 20% of the leads that will produce 80% of the business.
Some companies may find that they need to drill down to and focus on only these high value leads, rather than attempting to secure other leads within the business.
Improving upon your customer acquisition cost will make your business both more stable and scalable, as it will reduce your marketing expenditures while still letting you capture as much profit as possible. However, it isn't all about the CAC: it's also about the retention costs and the lifetime values.
Customer Lifetime Value vs. Customer Acquisition Cost
A customer acquisition cost needs to be seen relative to the customer's lifetime value. An acquisition cost of $100 is low if the lifetime value of the customer is $10,000. An acquisition cost of $10 is too high if the lifetime value of a customer is $5. Companies need to be aware of the whole picture of their revenue and expenses to determine whether a customer acquisition cost is reasonable.
Lifetime value is the amount that the customer will spend with the business throughout their relationship with the business. Some companies only expect to see a customer once, or very infrequently, such as real estate firms. Other companies expect that a customer will come on a regular basis, such as restaurants. The lifetime value of a customer is going to rest primarily on how often the customer interacts with and purchases from the brand.
Customer lifetime value quantifies the value of what the customer acquisition actually brought into the business. Without customer lifetime value, you know how much every customer cost to bring in, but you don't know how much those customers were worth.
In general, a good lifetime value (LTV) to customer acquisition cost (CAC) is 3:1. If a customer is being brought in for $100, their lifetime value should be at least $300. Otherwise, you will be spending too much drawing in your customers; it will become important to fine tune, streamline, and optimize your marketing and your advertising.
A ratio of 1:1 is bad: you'll only be breaking even on your customer acquisition cost, and your business may not be gaining any ground. However, ratios of 1:1 or even worse are frequently seen when a business is initially scaling. If a company is attempting to grow aggressively, it may be able to do so by sacrificing its LTV:CAC ratio. Ideally, once this growth has been achieved, the company will find it easier and more affordable to gain further clientele.