Keeping past customers and boosting customer loyalty is often a lot less expensive for your company than acquiring new customers. But, have you ever stopped and actually calculated what it costs your business to obtain a new customer?
Customer acquisition cost is an important metric. It allows you to see what your company spends bringing in new clients and how that cost relates to what the customers actually purchase from you or whether they return for repeat business. Figuring out the customer acquisition cost is just one piece of the puzzle. You also want to look at what you can do to reduce it and how it can affect your company’s ability to scale.
Calculating Customer Acquisition Cost
The concept of customer acquisition cost is pretty simple. It’s how much you spend, per client, to get a new customer. Typically, two components come into play when you figure out acquisition cost. One is the cost of marketing and the other is the cost of your sales team. During a quarter, for example, you might spend $20,000 on marketing and $60,000 on a four-person sales team, meaning $80,000 goes towards getting new customers. That $80,000 brought in 800 new customers during the quarter. If you divide 80,000 by 800, you end up spending $100 per customer. That’s your customer acquisition cost.
What CAC Means for Your Business
On its own, saying that your customer acquisition cost is $100 doesn’t mean much. You need to look at the cost of acquiring a new customer in terms of what the customer purchases from you and in terms of the lifetime value of the customer. If you spend $100 to acquire a new customer and the customer ends up making single a $250 purchase from you, which brings you a profit of $150, you’ve ended up spending $100 and only pocketing $50.
But, if you spend $100 to initially get a customer’s business and he or she returns to you, making $250 purchases every quarter for 10 years, and you earn $150 from each purchase, you’ve spent $100 and end up bringing in $6,000 over 10 years.
There are a few ways you can reduce the overall cost of acquiring customers. One is to actually reduce the cost of getting customers. For example, you might not actually need to spend $60,000 on your sales team, especially if you are getting much of your business from online marketing.
Another option is to focus on improving the lifetime value of a customer, or the amount they spend with your business over the course of your relationship. Loyalty programs that encourage repeat purchases, email newsletters that let past customers know what’s new, and frequent product updates and improvements can all keep your customers coming back for more. A general rule of thumb is to have your customer’s lifetime value be about three times their CAC.
How CAC Affects Your Company’s Ability to Scale
Investors and funding partners typically want to see a CAC that is as low as possible. The lower your CAC in comparison to a customer’s lifetime value, the greater your company’s ability to turn a profit and grow. It is difficult to focus on improving a product or service or to look to other regions to expand into if you are a spending a significant amount of your company’s revenue on getting new clients. Having an ideal lifetime value to CAC ratio also shows investors that you have a good grasp on what your company needs to do to get new customers, and what it needs to do to get the most out of them once you’ve acquired them.
If you aren’t sure what your company’s CAC is or aren’t sure how it relates to your customer’s lifetime value and overall loyalty, working with the virtual CFO team at New Direction Capital can help. Our team can help you spend less on getting new customers or help you focus on improving your relationship with clients, so that they return for repeat business. Contact us today to learn more.
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