Want to calculate your customer acquisition cost? Use the calculator below:
Want to calculate how long it will take the recover the cost of acquiring your customer? Use the calculator below:
What does customer acquisition cost mean?
For every customer you manage to get to purchase your product or to pay for a membership, there is usually a cost acquired to get them to become a customer. This is your customer acquisition cost – the cost to acquire new customers.
The cost to acquire these new customers includes marketing expenses relating to sales specifically such as: advertising, salaries, commissions and bonuses etc.
The lower the cost to acquire new customers, means there is more margin for profit.
Why should you calculate and monitor your customer acquisition cost?
Understanding how much it costs to acquire a new customer will allow you to make important financial decisions for your business moving forward.
Every business understands that if a product isn’t profitable, it isn’t sustainable. Calculating and monitoring your customer acquisition cost is a key metric to determine if a specific product is profitable for your business.
However, it can also uncover whether you’re spending too much to acquire new customers. In some cases it is unrelated to the product, rather how it’s being marketed. If your product isn’t converting profitably, look into whether your marketing strategy is working.
Singular or recurring payments?
Not every business functions in the same way, some sell singular products, others have membership based products.
With singular products, or ‘one-off’ purchases the customer acquisition cost is based on getting that individual sale. For example, it could cost $10 to acquire a customer to spend $50 in your business, the acquisition cost is always lower than the amount the customer spends to ensure the product is turning a profit.
For those businesses who have membership based products the acquisition cost can be significantly different, because these products involve recurring payments. What this means is even if the acquisition cost is higher than the monthly payment, this doesn’t necessarily mean it’s not profitable, because the amount is a recurring payment.
In these situations we have another metric to focus on – your recovery time, which is how long it will take for your business to recover the cost spent to acquire that new customer.
Let’s use a music streaming service as an example. It costs $5 per month to become a member, however the business spends $30 to acquire each new customer.
Here we have to calculate how many months it will take to recover the $30 spent to acquire that customer. We take the CAC and divide it by the recurring payment, this tells us how many weeks, months or years it may take to recover the acquisition cost.
$30 acquisition cost / $5 monthly payment = 6 months to recover the acquisition cost
A shorter recovery time is preferred, however it will vary from industry to industry and also the product type. Digital products tend to recover quicker than physical products.
Anything over 18 months can be problematic for some businesses, especially if it’s a recurring payment that can be cancelled at any time.
One tactic that some businesses use to ensure they’re able to recover the acquisition cost is to offer yearly membership exclusively, rather than monthly payments where you can cancel your membership at any point.
How to calculate CAC
To calculate your customer acquisition cost you need to add up all your sales and marketing costs and divide it by the total number of customers acquired.
Sales & marketing costs / new customers = CAC
For example: a beauty business spends $3,000 on a campaign which brings in 114 new customers.
$3,000 / 114 = $26.32 to acquire a new customer
How to calculate CACRT
Continuing with the beauty business, they offer a monthly subscription service of $10.
To calculate your customer acquisition recovery time you need to take the customer acquisition cost and divide it by the monthly subscription fee.
CAC / revenue per period (week/month/year etc) = CAC Recovery Time
For example: it costs the beauty business $26.32 to acquire a new customer, therefore we divide this amount by the monthly subscription fee of $10.
$26.32 / $10 = 2.6 months to recover the acquisition cost
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