Customer Acquisition Cost: How Much Does a New Customer Cost?
Posted: Sat Dec 21, 2024 4:17 am
When it comes to accounting, it's often a headache for you and your accountant. If there is one key performance indicator (KPI) that few managers know, it's the customer acquisition cost. What is it, how do you calculate it, and how do you optimize it ? In this article, we discuss this strategic indicator that should also be seen as an investment with the goal of winning new customers and, ultimately, retaining them .
What is customer acquisition cost (CAC)?
The acquisition cost can be defined as the amount invested (sales and marketing budget) to "recruit" a new customer. More pragmatic than the cost per lead (or cost per prospect), it allows you to measure the america cell phone number list effectiveness of your marketing and sales actions .
In the start-up phase, growth phase or for start-ups (in business plans in particular), this is an essential subject. It allows, in fact, when defining objectives , to estimate how much you need to invest to have the number of customers necessary to first reach the break-even point, then the moment from which you make money.
* it tends to reassure investors: you prove to them that you are methodical in your forecasts, not only for sales but also for your marketing budget .
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How to calculate your customer acquisition cost?
I learned during a meeting of entrepreneurs that the majority of CAC 40 companies were not able to determine their customer acquisition cost .
Basically, we know what we spend on marketing and sales, but we don't really know what it brings in.
If you don't know him, there's no need to be alarmed.
Which doesn't stop you from starting to gather the elements to know him.
Here is the formula to calculate your customer acquisition cost: customer-acquisition-cost-meeting-calculation
CM = the total cost of marketing investments includes media purchases, prospectuses, flyers, press inserts (PQR/PQN), magazine press, TV spots, brochures, POS, radio, digital, displays and other billboards, etc.) and support from your agency to acquire new customers
CC = Total cost of investments of the sales department including invitations, trade fairs, open days, incentives... to acquire new customers
CA = Number of customers acquired during the period
For example :
If you invest 500,000 euros per year to win customers and you have acquired 50 new ones; then your CAC is 10,000 euros. It is then up to you to determine if this CAC is profitable for your company and in your market.
10K€ may seem expensive, but if we sell production lines at 1M€ per unit, that's 1% of marketing and sales investments. So not much.
It all depends on your business, your market, the methods used so far...and its lifespan (ability to buy back)
CAC & Customer Lifetime (LTV):
It is essential to understand how your CAC evolves based on other indicators such as gross margin and customer lifetime value ( LTV) , i.e. the profits made during the lifetime of a customer.
Let’s look at 2 cases below:
2.1. The CAC is higher than the gross margin achieved on the average basket
That is to say, for each new account won, you pay more to recruit a customer than you earn from acquiring the customer .
In this case, it is vital to retain them to increase the LTV , otherwise your business will not generate profits. You can also increase the purchase recurrence or the average basket (up-sell and cross-sell). The ideal is to do both, of course, which will offset your customer acquisition cost and boost your profits.
What is customer acquisition cost (CAC)?
The acquisition cost can be defined as the amount invested (sales and marketing budget) to "recruit" a new customer. More pragmatic than the cost per lead (or cost per prospect), it allows you to measure the america cell phone number list effectiveness of your marketing and sales actions .
In the start-up phase, growth phase or for start-ups (in business plans in particular), this is an essential subject. It allows, in fact, when defining objectives , to estimate how much you need to invest to have the number of customers necessary to first reach the break-even point, then the moment from which you make money.
* it tends to reassure investors: you prove to them that you are methodical in your forecasts, not only for sales but also for your marketing budget .
New call-to-action
How to calculate your customer acquisition cost?
I learned during a meeting of entrepreneurs that the majority of CAC 40 companies were not able to determine their customer acquisition cost .
Basically, we know what we spend on marketing and sales, but we don't really know what it brings in.
If you don't know him, there's no need to be alarmed.
Which doesn't stop you from starting to gather the elements to know him.
Here is the formula to calculate your customer acquisition cost: customer-acquisition-cost-meeting-calculation
CM = the total cost of marketing investments includes media purchases, prospectuses, flyers, press inserts (PQR/PQN), magazine press, TV spots, brochures, POS, radio, digital, displays and other billboards, etc.) and support from your agency to acquire new customers
CC = Total cost of investments of the sales department including invitations, trade fairs, open days, incentives... to acquire new customers
CA = Number of customers acquired during the period
For example :
If you invest 500,000 euros per year to win customers and you have acquired 50 new ones; then your CAC is 10,000 euros. It is then up to you to determine if this CAC is profitable for your company and in your market.
10K€ may seem expensive, but if we sell production lines at 1M€ per unit, that's 1% of marketing and sales investments. So not much.
It all depends on your business, your market, the methods used so far...and its lifespan (ability to buy back)
CAC & Customer Lifetime (LTV):
It is essential to understand how your CAC evolves based on other indicators such as gross margin and customer lifetime value ( LTV) , i.e. the profits made during the lifetime of a customer.
Let’s look at 2 cases below:
2.1. The CAC is higher than the gross margin achieved on the average basket
That is to say, for each new account won, you pay more to recruit a customer than you earn from acquiring the customer .
In this case, it is vital to retain them to increase the LTV , otherwise your business will not generate profits. You can also increase the purchase recurrence or the average basket (up-sell and cross-sell). The ideal is to do both, of course, which will offset your customer acquisition cost and boost your profits.