Customer Acquisition Cost (the cost that comes with acquiring a new customer) aka CAC, is the number one cause of death to new startup companies across the globe. In fact, over 30% of new companies fail within the first two years because of the high cost of acquiring new customers and about 50% fail within the first five years.
How do these start-ups survive? Customer Lifetime Value (CLV). CAC should always be less than the CLV. Constant returns from every customer will eliminate acquisition cost, and expand revenue giving you more wiggle room in your finances.
CAC can be very high even for a major corporation. Plus it's about as complex as the engine of a 750 horsepower truck. I'm not a math whiz so I'm not going to bog you down with formulas and variables. I'm going to take it slow starting with taking some factors to take into consideration; so that any business regardless of size, industry or demographic is able to employ the logic behind CAC.
- Total # of Customers
- Total Marketing Cost
- Total Sales Cost
Example 1: The Dentist
I didn't choose to use the dentist as an example because I love going to the dentist, trust me, I don't. I chose it because I knew I could get my point across easily. So, on that note let's check out how a dentist calculates CAC.
Total # of Customers: 80
Total Marketing Cost: The cost of getting the attention of a prospective customer (for a local dentist, it's usually newspaper ads). On a recurring basis, this dentist takes out a $50 newspaper ad out every week of the year.
Total Marketing Cost = $50 x 52 = $2600
Total Sales Cost: This gets tricky because for a dentist because when a patient comes to them it's a sales opportunity. If the patient likes this dentist then they are most likely going to became a regular patient. If the patient doesn't like their experience they'll take business elsewhere.
The most common procedure at the dentist is teeth cleaning let's take the average cost of a dental cleaning, and we'll use that, which is about $100.
CAC: ($2600 + $100) / 80 = $33.75 per customer
Keep in mind that not every person you market to makes it to the sales process and becomes a customer. Marketing costs are very high and can become drastically higher over time.
Example 2: Travel Agency
Let's take a larger view on CAC as I dedicate this to Kaley Cuoco and Willy Shatner (but mainly for Kaley), I love those commercials (but I love Kaley a little more). When looking at a company in the travel industry, marketing costs are uniquely high since they appeal on a national basis (unlike the local dentist).
Total Marketing Costs (television advertisements, select newspaper advertisements for regional branches and web marketing): $20,000,000
Total Sales Costs: $5,000,000
Total # of Customers: 2,500,000
Total CAC: ($20,000,000 + $5,000,000) / 2,500,000 = $10
Keep in mind, CAC for a nationwide industry will be a lot cheaper due to its immense size and reach.
Example 3: Apparel Store
To be honest, I've had writer's block for an hour now, and this one came to me because my coworkers gave me grief about my decision to wear basketball shorts instead of khaki shorts today. I forgot to wash them, it happens. Anyway, I like this example because there's so many stores that sell clothes, both locally, regionally and nationally.
Now, let's talk about a regional store. Its costs most likely include print advertising around the area (newspapers or magazines etc.) and maybe local commercials.
Total Marketing Cost: $105,000
Total Sales Cost: $20,000
Total # of (Repeat) Customers: 2000
Total Customer Acquisition Costs = (105,000+20,000) / 2000 = $62.50 per customer
Other Important Factors to Consider
- Amount of new customers in previous month, year, etc. (if your company is a start-up, research the average amount of new customers per month for similar companies)
- Current Revenue: Are you able to spend the necessary amount on marketing and sales to expand your business without having your salary and your employees' salary pay for it? Will your business suffer if you spend too much on CAC without hurting your revenue and profit?
- Marketing effectiveness and buzz: Do people know and recognize your company and are they hearing about you through news, social media and other vehicles.?
All in all, this is not a perfect way to calculate customer acquisition costs, but hopefully this gave you some insight, whether you are a student, professional or business owner. For a more detailed analysis and calculation, feel free to contact us!
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