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Traction Customer Acquisition Costs

Traction Customer Acquisition Costs

 
Customer Acquisition is a process or a transition phase, from the point where a potential customer notices your company and your product/service to the point where he actually makes a purchase. In this article you will get a detailed explanation on why it is so important to have a clear picture of how big customer acquisition costs can be.

Customer Acquisition Costs (CAC) means the amount of money you pay in order to attract a new customer and earn their loyalty. The simplest pattern in which CAC are formed is as follows

You determine CAC by dividing the total costs associated with acquisition by total new customers, within a specific time period.

Please do not confuse this metric with CPA, which is Cost per Action or Pay per Acquisition (PPA). This one typically refers to a sum of money that you pay for a new customer conversion; to illustrate, the conversion from a potential client to an active, regular client or a conversion from a regular client to an expensive purchase client.
When we talk about CAC we speak exclusively about gaining new customers.
 

How You calculate the Acquisition Costs for Your Business?

Get the free CAC Calculator and gather facts

Free
Functional as Google Spreadsheet

 
It has a calculation for each Marketing channel and inspires You for planning other channels.
Do you have a comment or review to the CAC calculator or this Article? Leave it at the Comments Area below the Article.
 

What does Customer Acquisition Costs actually mean to your business?

Okay, now, as we got the idea of what CAC is, it’s time to understand why it is so important. We have some job to do here to get clear about how it helps you to generate more revenue.

Along with customer lifetime value (CLV or LTV), Customer Acquisition Costs is one of the weightiest metrics for businesses, whether it’s brick-and-mortar or an online business. Why? Because it is actually an income generating value. As a rule it is applied when a customer actually pays for goods or services that your company offers. The money retains within your company only when customer acquisition costs are smaller than the revenue generated from having this customer purchasing with your company.

Here is the important ratio: LTV : CAC

Your business fails when your customer acquisition costs exceed the customer lifetime value.

Below you’ll find a couple of useful examples on LTV : CAC

Less than 1 : 1 – it looks like your company may sink into oblivion in no time
1 : 1 – you are losing money with every acquisition
3 : 1 – a perfect level. Your business is thriving and your business model is solid
4 : 1 – good news, however, but your company does not seem to be really attractive for investment, and you might consider growing faster. Launch a more aggressive marketing campaign in order to gain new customers and return the ratio closer to 3:1

Along with CAC you are also advised to estimate, the most effective channels for your marketing initiatives. The aim is, actually, to choose those channels that offer the highest LTV:CAC ratio and are preferably scalable. Therefore, you’ll be able to strike a balance between time/ expenses, LTV:CAC and the number of customers acquired.

 

How you calculate costs for Customer Acquisition

There are two methods in which you can determine your customer acquisition costs with one being a simpler (but less accurate) way and the other a more complex way that embraces all of the variables involved. All in all, there seems to be only one correct method, which is the complex one. Yet, the simpler option is anyway better than not to have any idea of how much one client would cost you.

Also, be cautious, using the simple method, since the data for LTV: CAC obtained by the simple method can show a certain amount of inaccuracy, which means you can waste some money for nothing.

The shortcut method for CAC calculation


CAC = Customer Acquisition Cost
MCC = total marketing cost for acquiring customers (not regular customers)
CA = total customers acquired

Complex (correct) method for CAC calculation


CAC = Customer Acquisition Cost
MCC = total marketing cost for acquiring customers (not regular customers)
W = wages connected with sales and marketing
S = all the marketing and sales associated software cost (inc. E-Commerce-Platform, automated marketing, A / B-testing, analytics etc.)
PS = every additional professional service in marketing / sales (Designer, consultant, etc.)
O = other overheads associated with marketing and sales
CA = total customers acquired

 

Campaign or channel Analysis

If you consider analyzing your CAC based on a specific marketing campaign or a channel then you can start by determining such attributes as the amount of time that you deploy for one channel or a marketing campaign in order to understand the equivalent income level.
All of this can seem a little bit confusing and involve a bit too many nuances. Nevertheless, as you spend some significant amount of money on certain channels, I guess, you will want to dedicate some time to understand what one specific channel can bring you. This is the only way how you can actually see if it is profitable to operate some channel or it’s not worth it.

 

Improving your Customer Acquisition Costs

In order to improve and optimize your CAC you should filter one, the most efficient, channel over a specific time period. If it concerns online business you can start with improving the conversion on your website, or testing email campaigns with a special attention to those customers with whom the LTV:CAC ratio seems to be the best for your business.

I talk about it in other articles as well, but already today you should think the following over:
1. Your cost-per-Visit for every channel visited
2. Your visit-to-purchase ratio for every channel visited
3. The average Customer-Lifetime-Value for customers from one specific channel

I hope this article will help you to make progress that you deserve. I wish you good luck with calculating your Customer Acquisition Costs. If you have any questions, personal experience or valuable remark, be sure to leave your commentary.

Would You like to calculate your Customer Acquisition Costs?


Use the free CAC Calculator and create facts

 
In it You will find the calculation for the traction channels with regularly updated guideline values.
Again: If you have any comments, additions or constructive feedback, please leave a comment here below and we'll be right off to make this contribution even better.
André Wehr
André Wehr
As a founder and entrepreneur, I experience every day how important Traction and Customer Centricity is. It makes the difference between a nice idea and a viable business.

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