What are "Customer Acquisition Costs" and why are they important for your business?
Updated: Sep 24, 2019
Acquiring customers costs money. You have to spend money to get the word out about your brand and to motivate people to buy your products or services.
ALL costs that go into attracting leads and converting customers to make up your customer acquisition costs, also known as your CAC. Understanding what these costs are is incredibly important for your business. When you have a handle on this essential metric, you can take control of your success potential.
Ready to take charge of your business's growth? Here’s a quick guide to figuring out your customer acquisition costs and a look at why managing your CAC metric is so critical.
How to find out what your customer acquisition costs are
To determine the cost of customer acquisition, add up all your marketing and advertising costs for a set period. Digital ads, print materials, any ongoing marketing software costs – even the time spent on creating blog posts, social media posts, info graphics, and other forms of content marketing – make sure you account for everything, whether you paid for services or you accomplished the tasks in-house (you can track the time you or your team spent and add up the costs of those hours of work). You can use any period that works for you, such as one month, every three months, or every year. In fact, it’s helpful to keep track of your CAC metric using both the short and long term, such as tracking your monthly and annual customer acquisition costs. This will help you to spot trends. Next, divide your total costs by the number of new customers acquired during your set period. So, if you spend $400 on marketing in one month and acquire 40 new customers, you know that the cost of acquiring each customer is $10.
Why customer acquisition costs matter
When you can clearly see how much it costs to bring in new customers, you can then make the necessary changes to your marketing strategy as needed to help you reach your business goals. What if you find out it costs you way too much money to acquire each new customer? If you keep spending more than your business can handle to try and bring in new customers, you won’t have a business for much longer! You can do a couple of things to help solve this problem:
Scale back your marketing spend, at least until you can comfortably afford more. Focus more on retaining your existing customers – increasing customer retention by 5% can increase your profits by 25% to 95%. Then, as your cash flow improves, you can increase what you spend on effective customer acquisition to help grow your business. If your CAC metric turns out to be sustainable, that’s great news! You may be able to beef up your marketing efforts to bring in even more new customers.
Investors will want to know your CAC
Customer acquisition costs are also important when you need financing. This is because this metric is so indicative of how sustainable your business will be. When you approach investors or lenders for funding, you can include your CAC in your business plan.
Do you know your CAC metric? Take the time to figure this one out, and keep track of it. Trust me; this type of knowledge isn’t just powerful. It’s a business owner's superpower!