High CAC is an indicator of some issue in your business process. A look at some of the principles behind CAC, CLV, LTV and all those other acronyms... We can all agree that there are a lot of metrics to measure running ANY business. Each product costs you $50, so you add a 100% markup, enabling … However, we'll cover this more in the next section... A common question when working with lifetime value is how to deal with customers that have been 'reactivated' by marketing. Scenario 1. Gives an idea of the average total cost spent on acquiring a new customer. For example, imagine a $100 ad for a bakery in a local newspaper results in two new customers, but it also prompts a customer who hasn't bought in the past two years to try the bakery again. That's a far better way to improve CAC than by cutting marketing spend by 16%. For SaaS businesses, LTV looks like this: If you want more information on calculating LTV, we recommend the ChartMogul Ultimate Guide to SaaS Customer Lifetime Value. In this example above CAC is calculated on a 60 day ago basis, meaning that Customer Acquisition Cost here is calculated by dividing Sales & Marketing Costs from 60 days prior (2 months) by the number of new customers acquired in a current month. Generate real ROI on customer acquisition, Enhance your retention marketing strategy, Create more effective messaging, targeting & nurturing. So it may take a few days for us to provide accurate data. Now to the meat and potatoes of the article… The best thing to do is to calculate the customer acquisition costs for all customers over a specified period of time rather than doing averages or picking a few optimistic examples from the bunch. Armed with all this theory, it shouldn't be a stretch to calculate your own CAC and LTV, whether you use the calculator above or not. In this case we will include all the above costs – including staff costs – to determine that total acquisition costs are $5 million. The simplest pattern in which CAC are formed is as follows You determine CAC by dividing the total costs associated with acquisition by total new customers, within a specific time period. For example if you spend £100 on sales and marketing for a product, and in return get 5 new customers, it means you spent … So, the customer acquisition cost formula is as follows: Spend $100 on PPC and $50 on mailed flyers and end up with two customers? What to Include In CAC? However, the best businesses combine increased retention with increased spend – steadily upselling over time, so that they grow more valuable to the company as they progress through their time as a customer. To calculate the customer acquisition cost, divide the total acquisition costs by the total number of new customers. CUSTOMER ACQUISITION COST Customer acquisition cost (CAC) shows exactly how much it costs to acquire new customers and how much value they bring to your business. Event costs differ widely on a case by case basis, but you will typically want to factor in things like venue cost, payroll, audiovisual equipment, and headliner fees. Online businesses can also improve CAC by increasing the site conversion rate, which can be far more efficient than optimizing marketing spends. So … How To Calculate Customer Acquisition Cost. In its simplest form, it can be worked out by: Dividing the total costs associated with acquisition by total new customers, within a specific time period Improving lifetime value is a whole different ballgame – it's a metric that speaks to the quality of your relationship with the customer and how integral your business is to them. Customer Acquisition Cost Calculator (CAC) The Customer Acquisition Cost (CAC) is a metric used to determine the total average cost your company spends to acquire a new customer. Compare your metrics to other businesses of your size and type. You'll need to decide on how to treat repeat customers in your CAC calculations – we'd typically err on the side of caution and discount them altogether. Add up these expenses to reach your total costs. What you should include in those expenses: Salaries of marketing & sales staff (including payroll taxes) In order to ensure that the website is positively contributing to the company’s bottom line it is recommended that you examine the cost of customer acquisition as a key performance … Keeps a tab on your sales and marketing spend because an increase in CAC indicates there is an underlying problem. A CAC calculation compares the amount of money a company spends attracting new customers with the number of customers the company actually acquires. Cost of proposals (in staff time) – in some industries, it is necessary to tender or bid for a new client/customer – this also contributes to customer acquisition costs. Customer acquisition cost is the best approximation of the total cost of acquiring a new customer. Let’s say you want to calculate your customer acquisition cost for the quarter. If you signed up for a 'starter' bank account as a teenager and signed a mortgage loan with the same bank as an adult 20 years later, you've seen this in action. Business 101 says this: If you've got a product, you need to sell it. For example, let’s pretend that your company wants to establish the CAC for the last 6 months. Gives an idea of the average total cost spent on acquiring a new customer. This field is for validation purposes and should be left unchanged. The customer acquisition cost (CAC or CoCA) means the price you pay to acquire a new customer. 1. For example, there are multiple considerations in calculating the cost of customer acquisition for customers that joined via a free trial: Thirdly, you'll need to know your customers very well. To produce an accurate CAC you need to factor in associated costs such as staff time, subscriptions to products related to marketing (web hosting, for instance), and other hidden expenses such as discounts you've offered in promotional materials or the support time that's gone into supporting somebody who's taken a free trial or test drive. So if a $100 Facebook advertising campaign yielded the same results, it would be reasonably easy to see that (for example) 20% of the traffic had already visited before and therefore only $80 of spending should be treated as 'new' CAC spend (giving us a CAC of $40). The above formula is only your starting point. Basic maths tells us that we can improve a business's metrics in two ways – reducing the cost of customer acquisition or improving the lifetime value of the customer. Whatever method you choose, you'll have to pay for it (yes... even the last one – it's a time cost!). Customer acquisition cost formula. For most B2B SaaS businesses, the costs of acquiring a new customer are determined by two factors: The costs of generating a lead (usually determined by marketing expenses). 2.You will get to know about the performance standards of your company with Customer Acquisition Cost Calculator. 20-22 Wenlock Road London, N1 7GU United Kingdom, Nickelled Ltd © 2014-2020 Terms & Policies, Include all non-publisher spend: CRM, social media management, mailing list software, etc etc, Include other spend such as agency fees, but do not include billed publisher spend if already included in question 3. At lower than three, margins are squeezed, and the total headroom for the business may be questioned. That payment could take any form; it could be advertising on Facebook, buying ads through Google AdWords, sending out flyers to peoples' letterboxes or standing on a street corner trying to sign them up. Retailers tend to use advanced methods for calculating CAC because customer lifespans tend to be longer and the average spend tends to be shorter. The costs … If you’ve ever googled customer acquisition cost formula, you’ve probably found out that it looks pretty simple: Unless you know for sure that x% of the readership has already visited the bakery, it's nearly impossible to do – so you'll need to guess. We're benchmarking your cost of customer acquisition as you read this. So, perhaps the total bill of $100 for the advert is discounted by 10%, meaning the CAC is $45 rather than $50 (because the ad spent to acquire those new customers is now $90). We'll email your report as soon as we've gathered 10 anonymized submissions from companies of your size. If you're looking at a month's worth of marketing expenditure and comparing it to that month of sales, you're doing something wrong. For other types of business, there may be better ways to work out the total value of a customer over their time with the company or product. So for May, that’d be dividing $71,375 by 643 — yielding a $111 CPA. To calculate the Customer Acquisition Cost add up total expenses related to sales and marketing activities and divide that by the number of new customers signed. At the moment, we're gathering data from different companies to provide an accurate comparison. How to Calculate Customer Acquisition Cost. The difficulty, especially offline, is knowing by how much to discount. This is a particular problem for bricks and mortar businesses, who don't always know when a customer first walked in and how many times they'll subsequently visit (see the Starbucks example above). Customer acquisition cost is designed to measure and maintain the profitability of your acquisition teams. That's a thinner margin than we may have assumed on weekly revenues of $150,000 – because of the high CAC, her weekly profit is just $5000. Grasp it and work with it... And you'll be on a fast-track to success. Your CAC is $75 ($150 / two customers). Secondly, there are a bunch of costs that traditional calculators and formulas leave out – we've tried to include some in the calculator, but we won't have thought of all of them. So, without wasting a single minute, let’s understand the customer acquisition formula. The AMOUNT you'll have to pay, at the most basic level, is your CAC. A customer acquisition costs is an amount that is spent to acquire new customers for the company and is calculated by dividing the cost of acquisition by total new customers at a particular set period. Customer acquisition cost is the amount spent to acquire a new customer. For example, at a 5% conversion rate, 50 people will become customers for every 1000 visitors. Cost of acquisition also includes the expenses occurred in attaining a sale or a customer. Answers to Frequently Asked Questions about CAC. Now, if you’re wondering how to calculate customer acquisition cost and learn the CAC formula, make sure to read the following lines thoroughly. To calculate customer acquisition cost, you simply divide the total expenses associated with acquiring customers by the total number of customers that your business has acquired over a certain period. What is customer acquisition cost (CAC)? As a rule, investors will often look for a CAC to LTV ratio of three as a healthy number for a business – acquiring a customer shouldn't cost you more than a third of the revenue that customer generates. Your restaurant's total customer acquisition cost, or CAC, is all the money allotted in your restaurant marketing budget aimed at acquiring new customers.. Say you run an in-store promotion for your customers that focuses on customer retention; the money you spent on that promotion would not impact your customer acquisition cost … Maybe you already calculate your Cost Per Action (CPA) or Cost Per Install (CPI) and have an attractive spreadsheet to send to your boss. However, in the real world, that's not a fair calculation, and most business will apportion some of the ad spend as 'reactivation' spend. Customer acquisition cost is designed to tell you how much you need to spend to acquire a single new customer. If you're selling cars, it could be three months between someone seeing your ads and finally buying the car. In this fantastic PDF file, Kissmetrics and Avinash Kaushik have broken down the LTV calculation using Starbucks as an example. The cost of customer acquisition is one of the most important metrics — SaaS businesses must keep a close eye on it at all times because of their unique circumstances. This is done by dividing the total amount spent on customer acquisition by the total number of customers acquired, as shown in the equation below. Do you know what your Customer Acquisition Cost (CAC) is? Retailing costs Potentially a retailer in a high traffic location could allocate a proportion of its rental costs to customer acquisition. However, at a 6% conversion rate, 60 people will become customers for every 1000 visitors. Online, things are a little easier, because most decent analytics software (including Google Analytics) can determine whether a visitor has been to the site before. The best rule of thumb is to be spending 33% or less of your average customer lifetime value. If your boss asks you how much are you spending for one paying customer, would you know the number? Throws light on the efficiency of your sales and marketing efforts. That means getting customers – and usually, you'll have to pay to get those customers. Add all the monthly costs and divide by the number of new customers per month. Suddenly, the CAC drops to $50, a 16% fall. Sales and Marketing Cost is a Program and advertising spend + salaries + commissions and bonuses + overhead in a month, quarter or year. New Customers are a number of new customers in a month, quarter, or year, How We Helped Lendingkart Achieve Business Growth of 20% Through Google Ads, How we Increased Paysquare’s Website Traffic by Over 70%, Multi-Pronged Campaign Drove 40% Business Growth for deAzzle, Helped Masakha Become Pune's Top Seafood Restaurant, ©2021-22 UpGrowth    Cities We Serve: Pune, Mumbai, Bangalore, Delhi, Kolkata, Cities We Serve: Pune, Mumbai, Bangalore, Delhi, Kolkata. Acquisition Cost (Customers) = Total Acquisition Cost / Total … Customer acquisition costs are costs incurred to introduce new customers to a company’s products in hopes of acquiring new business. Divide your costs by the total number of new clients and there you have it – your customer acquisition cost. Tracking customer acquisition cost accurately is a difficult business, especially if you have a blend of marketing channels. Improving CAC can be achieved by optimizing marketing spends, cutting down on wasteful channels, improving targeting, using more free or lower-cost distribution methods (e.g., viral content, partnerships or freemium offerings) or reducing the total hours-per-deal (to cut people costs). How to calculate Customer Acquisition Cost That's why you should pair CAC with LTV (and why we did above) – it's a measurement of profitability. Here is an Ebook on 7 vital metrics every startup founder should know – you need to read if you want to increase profitability, retention and overall ecommerce success. Now imagine the company spent $1000 on marketing and related expenses last month, and acquired five customers, making their CAC $200. Now, every month, their customers pay them $100 on average, which means that over the lifetime of the customer, they will hand over an average of $1200. The CAC calculator above will give you a framework for working out a rough number for your business. Fail to understand it, and your business will sink. Let's imagine a SaaS business which keeps its customers for 12 months, on average. Obviously if it costs $100 to acquire a customer to your website who only spends $40 during their lifetime then you are losing money. Calculate your average time to break even on new customer acquisitions. Sales and Marketing Cost = Program and advertising spend + salaries + commissions and bonuses + overhead in an year. Teenagers are worth next to nothing as banking clients (as they have minimal deposits and no borrowing costs), but keeping that teenager around until they're ready to take out an $xxx,xxx loan with the bank is a smart move – which is why banks invest so much in stores like this to appeal to young adults: In case we haven't labored the point enough, CAC needs to be measured against LTV to be useful – put together, they form a magic ratio which is useful as an internal metric and also as an indicator to evaluate the health of a business. If you want to calculate CAC using more than the simple calculator above, there are a couple of gotchas you should know. To build a viable business, your revenue from a customer MUST exceed the money that you spent to acquire that customer. Have you ever calculated ALL of the costs involved in attracting a new paying customer to your app or game… For instance, if you have an average of 230 new customers a month, maintenance costs of $2,000 per month, start-up costs which average to $100 per month over a one-year period, and average promotions costing $200 per month, the cost of acquiring one customer … Don't worry, we'll reach out on email as soon as we're done. You do this by… 1. Customer acquisition cost: ($1,020,000 / 1,020,000 customers) + $1.00 per customer = $2.00 As in our previous example, the amount is worth only the money extracted from customers. The Customer Acquisition Cost (CAC) is a metric used to determine the total average cost your company spends to acquire a new customer. In the meantime, why not check out some of our other useful content for SaaS businesses? The formula is total sales and marketing spend over a specific period, divided by the number of new customers over that same period. HOW TO CALCULATE CUSTOMER ACQUISITION COST. If you want to understand how to do this for yourself (with more accuracy), read on. How should we deal with this? Now the CAC calculation becomes more complicated because we have to work out the value of the customer through their entire life (known as lifetime value or customer lifetime value... or LTV or CLTV). First of all, CAC can have a LONG lead time. And because the number of new customers attracted in the period, we can calculate the average customer acquisition cost as: Acquisition Costs (AC) = $5m / 1,000 = $5,000 (average per new customer… Technically CAC is the cost to acquire a NEW customer – for the purists out there, the repeat customer should be ignored altogether. 3. Let’s take a look at how all this would play out for two different types of companies and how each would calculate their customer acquisition costs. For example, if a business spent $100 and acquired 2 customers, their customer acquisition cost (CAC) is … But for most businesses, people will buy more than once – either by visiting a store repeatedly or paying monthly on a credit card (as is the case for SaaS businesses). Using the Customer Acquisition Cost Calculator By entering details relating to the sales and marketing expenses, the number of new customers acquired, customer subscription, gross margin %, and churn rate the customer acquisition cost calculator can be used to estimate the following. Customer … Calculating your brand’s customer acquisition cost allows you to assess their acquisition spending at the most granular level on a per customer basis. Increasing the 'life' of the customer (also known as customer retention) is one way to tackle lifetime value improvement – stop a customer from churning so soon, and they'll spend more over their lifetime. Each car costs $15,000, and the profit the dealer will make on the vehicle is $3,000 – giving her a gross profit of $30,000. Customer Acquisition Cost, as you know, is the cost of convincing a potential customer to buy a product or service. You work for an e-commerce company that sells products to customers for $100 each. However, to keep up that flow of car-buying customers, the dealer is spending $25,000 on newspaper ads every week. That’s why extending your CLV is essential to a healthy business model & overall business strategy…. Generally, SaaS companies have a low cost of goods sold (or COGS), typically 20-30% on average. Spend $100 on Facebook to get your first customer? Why is it important to know CAC? This simple explanation illustrates the customer acquisition cost formula, which looks like this: In our calculator above, you'll see that we've asked you to sum most of the core inputs into the formula, but you could easily split out CAC by channel by dividing the total amount you spent on a single channel by the number of customers it produced. If you've got a product, you need to sell it. How to calculate Customer Acquisition Cost (CAC)? In a simple way, the customer acquisition cost (CAC) can be calculated by dividing all the costs (money) spent on acquiring customers by the number of customers acquired. Let's imagine an auto dealership that sells ten cars a week, and never sees any repeat business. Armed with these two figures (assuming the LTV doesn't change), we can infer that the profitability per customer is $1000. Your CAC is $100. At a number higher than three, there's probably room to grow, by investing in more marketing channels. 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