If you don’t know what it costs to acquire a new customer, you don’t have accurate proof that your marketing dollars are being spent optimally. Many small business don’t understand the actual cost of turning their prospects into customers.
Here’s the best way to calculate your Customer Acquisition Cost (CAC)
First, you would take all your sales and marketing expenses over a given period. (Staff salaries are included as expenses.)
Then, divide this number by the number of new customers you were able to acquire over the same period.
So for example if your costs for a given year were $100,000 and you acquired 1,000 new customers, the math would look like this:
$100,000 ÷ 1,000 =
$100 to acquire each customer.
Congratulations! Now you know your CAC. But let’s not stop there…
Know the Lifetime Value of your customers (LTV)
The lifetime value of your customer is the amount of gross revenue they would bring you over their entire time as your customer. You also need to take into account any costs for supporting your product or service, and the costs of goods sold. You should know how much revenue you are generating and how many customers you have. The key is to track repeat business and know how much each customer averages over their lifespan as your customer.
The Math looks like this:
LTV = Net Profit ÷ Number of Customers Acquired over a Time Period
For example if you made $1,000,000 from 1,000 clients in a year, your LTV = 1,000 per customer
Why is Balancing CAC and LTV important?
Understanding the relationship between CAC and LTV is simple. Once you know how much a customer will bring you in revenue over their lifetime you can judge how much you should be spending to acquire them. If you are spending less to acquire them then you are getting in return for that acquisition your business is in a good position.
The good news is CAC can be reduced
and LTV can be increased.
How you ask?
How do you reduce CAC and raise LTV?
Unfortunately it’s not as simple as simply reducing your marketing budget. This will result in you acquiring less customers. The result would be your CAC staying the same if you are spending less but acquiring less customers. Here are some things you can do:
The web offers great power in tracking and targeting your marketing dollars, however it must be monitored vigorously and planned thoroughly. If not, costs can quickly get out of control. This is why knowing your CPC is an important step in making smart decisions about your marketing budget.