Business

Customer acquisition cost

Customer acquisition cost is the amount an organization spends to win over customers to buy the products they sell on their platforms.

The acquisition cost includes the amount of money that will be spent on campaigns and social media advertising platforms. 

Businesses have a duty to attract and convert new customers into regulars by all means possible. By creating good customer relationship management, you will increase your chances of retaining and converting more potential customers to loyal ones and, simultaneously, get your business on the top marketing funnel.

Acquiring customers is a never-ending process for all types of businesses. Marketers have gone out of their way to make the most out of their experience by creating awareness to acquire more customers. Well, not regular customers but hoping to find more new ones too. But let's face it, you probably don't want to lose your potential customers repeatedly. Instead of quitting, let us know what customer acquisition cost is and its basics that will get your business up and running!

In this article, we are introducing the ultimate guide on customer acquisition, and all you need to know is as follows down below;

  • Customer acquisition cost KPIs
  • Tips to reduce customers acquisition costs
  • Customer acquisition cost formula
  • CLTV to customer acquisition cost
  • Conclusion

Customer acquisition cost KPIs

CAC's key performance indicator(KPI) measures how much a company uses to acquire its customers. Ensure that the type of data you have is correct so you can use them to calculate your metrics and get accurate results. 

Tips to reduce customer acquisition costs

Every company needs to track its customer acquisition costs and, at the same time, ensure that it's benefiting from these activities. Reducing CAC for companies means that they are gaining more revenue for their businesses, and at the same time, customers are buying. Below is how you can reduce your CAC;

Focus on the target audience

This can be achieved by ensuring you have the right target market for your products. Knowing your audience will save you a lot of time and give you a well-focused goal that you will be working on without confusion. While on the targeted audience, consider giving them unique and good quality content because this is what will make them want to try out your products.

Introduce A/B testing

It's a good idea to involve A/B testing on your landing pages. This will help you figure out which one of your products does well compared to the other for your users. A/B testing will help you determine which products you will continue giving out to people, one that can increase sales.

Increase customer retention

Give your customers good products that will give them the urge of wanting to come back for more. Let them have a reason for wanting to be associated with your company and even introduce new people to you.

Increase your website conversion rate

You should keep tabs on what's happening on your website and how you can increase the number of customers while simultaneously making sales. Attract them with coupons and Calls To Action tactics for customers. You can also introduce checkout systems that users will use in case of a reduction in cart abandonment.

Implement customer relationship management

A good company should have an excellent relationship with its customers. You can make follow up checks on your customers to see their experiences, and this will give them the urge to want to come back and buy more since their experiences are good. You can try a marketing automation process for your customers.

Customer acquisition cost formula 

To calculate your CAC, you will have to divide the total cost of marketing and sales dived by the number of customers acquired, as shown down below;

How to calculate customer acquisition cost(CAC)

For example, if you have a business and let's say you've spent an amount of Kshs 80,000 on sales and Kshs 50,000 on marketing and the same month you earned 500 new customers, you will calculate the CAC by;

                                    80,000+50,000:500=Kshs 260

                                                                     

In this case, 260 will be your total CAC. All these calculations can be done with a normal calculator, or if you choose to, you can also use a free calculator online to help you with the math.

Example of customer acquisition cost 

Example of CAC includes the following;

Real estate company

We can give an example of companies that sell commercial buildings. They use an amount of Kshs 50,000 on marketing and Kshs 500,000 on sales. If the company gets 50 customers, the customer acquisition cost would be 

                  

                      50,000+500,000:50=Kshs 11,000

CLTV to customer acquisition cost 

As much as you will be focusing on CAC, you can also focus your plans on the customer's lifetime value as they go hand in hand together. Through the customer's lifetime value, a company can be able to predict the profit a customer will generate them. Primarily, investors use the LTV to determine how much profit or loss a company will have.

Importance of lifetime value to customer acquisition cost (LTV: CAC)

Determining the LTV: CAC ratio should be a process other than a process done at the beginning of your business journey. You can input it if your business is one year and above at least, with the value ratio of your customer at least three times higher than the money you are spending to acquire them.

  1. Most businesses use the ratio of LTV to CAC to monitor how much they spend on marketing and sales to acquire customers.
  2. By knowing your LTV to CAC, you will be able to know which marketing channeling is more effective in bringing you customers and, at the same time, saving on costs.

Formula to calculate the lifetime value

To get the ratio of LTV: CAC, you need to divide your lifetime value by customer acquisition cost.

                                  Lifetime value : Customer acquisition cost

Conclusion

It's always essential to consider measuring and monitoring your customer acquisition cost as a company. Ensure to keep track of them to help cut acquisition costs and as well increase your income revenue. Investors can determine through CAC whether or not your company will be beneficial or not. A good customer acquisition cost is the one that is lower than the customer's lifetime value.

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Bellah Mukisa
January 6, 2023

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