The Extreme Importance of Knowing Customer Acquisition Cost

The Extreme Importance of Knowing Customer Acquisition Cost

The Extreme Importance of Knowing Customer Acquisition Cost What does it take to get a customer on board?

There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.

This quote by Walmart mogul Sam Walton paints an accurate picture of what it’s like to work in sales nowadays. Customer is king—and he wants faster, better products and services that give him the best value for his money.

Today’s customers know the value of technology, and use it to their advantage—in fact, recent studies by the CEB Marketing Leadership Council show that most business buyers do not contact suppliers directly until 57 percent of the purchase process is complete. Instead of contacting marketers and salespeople, most folks use social networking sites, blogs and web forums to help them make sound purchasing decisions.

Good salespeople recognize the importance of this shift and are willing to take on new ways of selling to meet customer demands. More often than not, successful business leaders are tweaking the traditional sales cycle, adapting inbound sales techniques and pushing their teams to achieve higher productivity rates. More importantly, they know that one of the biggest challenges lie in creating and maintaining a strong presence, both online and in the real world.

As such, budgets are allocated and spent on big social media campaigns, creative teams are formed to develop enticing content, and sales teams are encouraged to make use of new systems to help analyse customer data, generate new leads and nurture sales relationships more quickly.

Indeed, spending big money for digital marketing is becoming more and more common. A survey of 2015 marketing trends show that budgets for online marketing campaigns are on the rise, with 60.7% of respondents predicting at least 10% growth of marketing budgets (specifically email marketing).

Looking at the changes in consumer behaviours, it seems that large companies, especially those engaged in inbound selling, need to spend big before they can earn big. After all, given the extremely competitive sales landscape, it makes sense to invest in making your brand stand out, right?

Well, in a sense, yes. But only with careful planning and execution.

One of the factors that sales executives often overlook when planning their budgets is customer acquisition cost.

Now, we all know that leads and clients don’t come knocking at our doors without a lot of effort on our part. But have you really looked at how much it is costing you to find new customers? Do you know the actual numbers of how much you spend to generate leads, engage with potential clients, close the deal and ensure customer retention?

No matter what the cost?

As the old business maxim goes, “You can’t manage what you don’t measure.” Yet many sales executives often neglect to measure just how effective those grand online marketing campaigns are in actually attracting more customers that will engage with us and purchase our products and services.

Because of this, many executives are lost when they see decreasing ROIs during yearly assessments. Failure to evaluate and see how ballooning customer acquisition costs are adversely affecting company revenues can lead to a serious lack of insight on your company’s sustainability and ability to grow.

Simply put, if you don’t calculate just how much it is costing you to transform that one lead into a paying client, your business may go down the drain, leaving you clueless as to why and how it happened.

Defined as “the cost associated in convincing a customer to buy a product/service”, customer acquisition costs generally help the company measure the exact value of one customer. Knowing your company’s exact CAC figures is extremely important simply because you need to ensure that you and your sales teams are generating sufficient income to cover the costs of running the business.

So how do we calculate customer acquisition costs (CAC)?

Many startups opt to compute CAC via the simplest method, which is by dividing the total amount spent in marketing the product (also known as marketing campaign costs or MCC) over the total number of clients it delivered (number of customers acquired, or CA), as inCAC

Using this formula, Company A, online shopping platform, that spent a total of $5,000 for developing marketing content (such as running banner ads and email blasts) which generated a total of 500 new customers would have a customer acquisition cost of $10, or

$10 CAC= $5,000 marketing campaign/ 500 new customers

However, there are problems with this method, especially if you’re running a big company with a sales team that performs a wide array of tasks to generate new leads and transform them into paying customers.

In this case, you will need to use a more complicated formula to accurately calculate customer acquisition costs, specifically one that considers all amounts spent in getting a new customer. Specifically, this formula is as follows:


Again, MCC refers to the total amount spent to generate a new customer, while W refers to wages that are paid to sales teams and other employees of the company. S refers to the total amount spent for software used by company employees, PS are fees paid out to consultants or professionals who may be required by the company and O refers to other overhead costs.

Let’s take a SaaS provider as an example. Company B develops and provides cloud-based software to help other companies keep track of their sales. Let’s say that in a month, Company B spends a total of $ 5,000 for SEO and content marketing, pays a total of $2,000 to their call center team, spends an additional $1,000 on gamification software to boost employee productivity, pays $100 to an inbound marketing specialist and incurs a total of $1,000 on other operating expenses. At the same time, they managed to generate 1,000 new customers.

What would their customer acquisition costs be?

$ 9.1= $5000 MCC + $2000W + $ 1000S + $100PS + $1000/ 1,000 new customers

Looking at the above example, we can see that Company B spends a total of $9.1 to generate 1 new customer. Now if they price their services accordingly, Company B will be well on its way into making ahefty profit.

However, there are other factors that you still need to consider when calculating customer retention costs, such as customer lifetime value (CLV).

CLV represents “valuable” customers who make repeated purchases or subscribe for a longer period of time, compared to one-time clients who may not return. This is an important metric to consider because it actually costs five times more to attract a new customer than to retain an existing customer. In fact, a study has shown that even a small 5% increase in customer retention can increase a company’s profitability by up to 75%!

So how do we calculate CLV? The simplest way to calculate would be to multiply the annual profit contribution per customer by the average number of years that they’ve patronized the company. You then take the total amount and subtract the initial customer acquisition costs.

So if we look at Company B’s example, the CLV of a client who’s signed up to $50 yearly subscription for the past two years would be $90.9, computed as

$90.9 = $50 annual subscription fee x 2 years – $9.1 CAC

Looking at Company B, we can see that they have low product distribution costs, their current customers need a relatively low level of customer support, and they have high retention rates because it would be much harder for clients to migrate to another software provider. In short, they’re driving revenues up by providing valuable services that clients will find extremely hard to replace.

There are also many online CAAC and CLV calculators that you can use if you’re pressed for time.

Becoming a lean, mean selling machine

Now that we know how to calculate CAC’s and CLV’s, let’s look at a couple of ways by which you can cut back on your customer acquisition costs and improve your ROI’s.

1. Identify your target niche and ideal buyer personas. The success of inbound marketers often relies on the quality of content that they offer to the client. Having an in-depth knowledge of who your potential clients are, what they want and when they want it is crucial to developing the perfect content that can entice them to close a deal with you.

2. Identify and maximize technology to drive up productivity. Low occupancy rates among call center agents can be quickly resolved by the use of automated dialers. With automated dialers, agents get to spend less time dialling numbers and instead get more time talking to actual customers and leads. This improves the quality of customer engagement, drives up employee quota achievement rates, lowers customer acquisition costs and boosts up sales.

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Patrick Hogan

Patrick is a Co-Founder & Chief Executive Officer of Tenfold.

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