A lot of people have a misunderstanding about how to calculate their customer acquisition cost. I want to clear that up for you by using this subtle equation to figure it out.
What is Customer Acquisition Cost?
Customer acquisition cost is the cost that you have to pay to acquire one new customer (CAC/CA). Essentially, the CAC customer acquisition cost is MCC. That is total marketing campaign costs over the number of customers acquired.
That’s what you’re trying to get. You need to look at how many customers you acquired at the end of the month and figure out how much you spent in that marketing to get the customer acquisition cost.
It’s a significant number. I don’t care how you started, maybe you started last year, or you’ve been in business for 40 years, you need to understand what it cost you.
People don’t really have a good idea of what it cost to acquire a new customer.
I really want to help break it down by giving you a slightly longer equation so you can work off this, and figure out your exact customer acquisition cost, as you’ll be much better off. You’ll know when to invest more when to cut back, and you’ll know what’s working, what’s not working.
How to Calculate Customer Acquisition Cost
CAC = MCC + W + S +PS + O / CA
- Multiple marketing businesses.
- Ads promoting payday or improved cash loan services.
- Ads promoting bidding fee or penny auctions.
For customer acquisition cost, you have your total marketing campaign cost. And the W is what represents the wages, which means that the people part right be the wages that are associated with marketing and sales. Remember this is your marketing and your salespeople. Because they’re in the picture as well because for you to acquire a new customer in marketing organisation, you need to have three or four or fifty salespeople or a thousand salespeople that need to work for you to acquire the customer. And the S represents software. You need to understand how much software is costing you, which should be only a small fraction of your marketing budget.
And the PS is your professional services. That is your agency, which is the copywriter, which is all the people that are involved in helping you deliver the marketing campaign. Maybe you don’t have enough resources internally that you have to go get some professional services. And lastly, you have your O that is your overhead. So you need to understand what part of your cost goes to your marketing and salespeople.
At the end of the day, if I just give you empty C /CA, most people miss the sales and marketing people. Which like I said you’re going to know how efficient your salespeople are by looking at this particular cost per acquisition.
You need to make sure that the salespeople are part of the puzzle. Salespeople understand that, and at the same time marketing, people feel like they’re excluded from the cost-per-acquisition. They feel like it’s only a salespersonâ€™s job. The salespeople got to give me more deals, marketing is just here doing some brand awareness. If we got our email campaigns going, everything is looking great; we got no new customers, whose fault is that? “Oh” it’s the salespeople’s fault, but technically in the equation, marketing and salespeople are in it. So at the end of the day, if you really want to know what it cost you, you need to make sure that you’re your cost for your marketing salespeople. You need to make sure that you have your salespeople’s salaries, and all the wages, and all the expenses that are related to that, and your marketing folks. And make sure that they’re in the picture.
And software similarly, you might have sales software. Maybe you have marketing software, or perhaps you know additional analytics software. It’s an essential part to measure your CAC, so you might need to invest in more and more software. I understand that and professional services you have to find that they are those people delivering value for you and your organization. That’s where the expert services are.
And finally, your overhead. So if you want to cut, you need to start cutting across the board. Because of this particular number (CAC), if you actually do the math, you do the exercise you go through the equation above, and you have to add everything up, and you look at the cost per acquisition, you may have a heart attack. It’s very possible because you might be overspending. This number (CAC) is very critical to the long-term sustainability of your business.
What is Marketing Campaign Cost? (MCC)
It is the sum of all of your marketing and sales expenses over the number of net new customers you can bring to the organization. Now, this is different every month, because you know one customer might come in March, but you’ve been working on them since December. But I understand that you know you work every quarter. You’re on a rolling quarterly basis. I know all the metrics, they’re all different. But at the end of the day as the organization from a finance department or the CEOs perspective, you need to understand that whether it takes three months to close the deal, or it takes three days to close the agreement, the number is the number (CAC).
What Does Customer Acquisition Cost Really Give You?
The CAC is the number you need to work on. This decides whether or not you have a marketing budget. This will determine if you need more marketing people or your salespeople. This will determine whether or not you need more software or professional services or even bringing out more resources internally to execute. It is all going to be dependent on this number (CAC). So what does this number (CAC) really give you? This number will provide you with the efficiencies of your marketing and sales department as a whole. If this number is awful, that means that for every $100,000 that you invest, you know you’re getting ten new customers. Probably not the most efficient thing that you got. For maybe every one million that you spend.
I’m going to add another zero, and you get 10 new customers it costs you $100,000. To get one new customer, you need to really look at the people aspect of it. You got to look at your process, which is not just your sales process but also your marketing process. And figure out how efficient your system is. You might have some inefficiency, and I understand that it’s okay to have that. As long as you know that you have some inability.
Do What is Working for You
You might have marketing campaigns you’re doing. Because you think your competitors are going to be in such trade show and you need to be there, and you’re just trying to outdo them, and it calls you tens and thousands of dollars in foolish mistakes. Because you are up to your competition when you truly know that this is not working for years. It’s actually working against your map.
So it might be time to cut some cost, and maybe it’s time to be more efficient. Look at what’s working for you. One way to reduce your cost is to figure out what’s working for you. That’s ultimately going to lower your cost per acquisition because that’s precisely what it’s meant to do. It’s intended to find out its live channel working for you. Is it a paid media that’s working for you, or is it social media that’s working for you?
I don’t know what works for you, but you need to do more of it. Because that’s how you’re going to drastically lower your cost per acquisition and the better this number is, the more exciting it is to run that business. Let me tell you, if you ever watch any single Shark Tank episode, you never watch another one. You’ll know this question is straightforward. You know this question comes up really fast. How much does it cost you to make such-and-such? How much does it cost you to bring a new customer? And when you have a company that has pre revenues, I ask them what it costs to bring a customer. They literally, every single one of them will say I’m out of this deal. Every single one of the Sharks will be out of that deal because they don’t want to assume any numbers. They don’t want to think that it’s easier than what it is.
They want to make sure that they know what it costs to acquire so that as an investor or any marketer, we want to put a dollar in getting two dollars back. They wish to invest a dollar in.
This is hypothetical math. It’s not exactly, but the idea is that for every dollar that you put in, you’re going to get two dollars back. So if you put 10,000 and you’re going to get 20,000 back. You put a hundred thousand, you going to get 200,000 returns. Who wouldn’t want that business? That’s the goal here, but at the end of the day, though in your reality it’s not that easy. So I wanted to do some math to figure out what it costs your marketing campaign.
All the costs associated with it divided by the total new customers you brought out
Do it every week if you had to, and if you’re obsessed, do it daily. But really figure out what does it cost to run that organization, sales organization, marketing organization, the overhead, the software, the outsource people right, the professional services. And figure out what is making you more money.
Are you in a position to invest more and know that there’s predictable revenue coming back for every dollar you invest in? If you don’t have it, it’s time to work on the process. It’s time to work on the people part and figure out what you can do better. What tools do you need to have better visibility into what’s working? And then invest more and more, go double down on what’s working.
I’ll be honest with you if referral marketing is working for you, double down.
If organic is working for you, double down. If trade shorts are not working for you, kill it, forget about it. Decide that you’re not going to invest into that because it’s not helping your bottom line.
Now you might be thinking to yourself, maybe it does cost a hundred thousand dollars for a new client. But you don’t know the lifetime value of the customer. I want to make about lifetime value and how do you calculate that, If that’s perfect. You understand that maybe investing a hundred thousand you’re going to get a million back, so you’re only spending it. You know 10 percent of it, and that means that you’re getting 10x the return that’s amazing. I’m happy for you, I wish everybody is in the same place as you are.
The reality is most people have no clue what their customer acquisition cost is, and they wouldn’t even know how to figure out their LTV or their lifetime value of a customer. So I want to help every single marketer out there understand that this is a huge piece of your puzzle. If there’s the number is alarming for whatever reason for your organization, they need to work on improving your conversion rate. Not just the people that are filling out the form on your website. It’s the people that actually filled out the contact, you generate the contact to close rate. And if you’re looking to find ways to lower your customer acquisition cost, then you might want to look into inbound marketing. Maybe your organization is doing something bond marketing, but you need to look at ways to generate more leads that are looking for what you do right to bring down that customer acquisition cost. Because it costs ten times more money to go out and create interest for someone who’s not interested than to help someone already interested in what you’re looking for.
Lastly, I want to end with this. I want you to master these marketing techniques. Is it marketing metrics, the sales metrics, the ultimate metric being customer acquisition cost? And you will become a much better Wiser, brighter, smarter, more efficient marketing organization or sales organization or just an overall organization. And you’ll be much more profitable in the year because the sooner you figure this stuff out the more you know you’ll be able to solve other challenges that may be facing your company.