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April 15, 2022

You must sell a product if you have one, which means you need customers and usually, you will need to pay for them. These marketing costs should be put into account when you’re doing your business plans. This article teaches you all you need to know about the cost of acquisition calculator.

This payment could come in any form: when you advertise on Facebook or buy ads through Google AdWords. It could also include flyers being sent to people’s letterboxes or standing on the street corner trying to sign them on. You will have to pay for advertising costs, no matter what method you choose (yes, even the last one!).

Cost of Acquisition Calculator

Your customer acquisition cost is the smallest amount you will have to pay. To get your first customer, spend $100 on Facebook. Your CAC is $100. You can get two customers if you spend $100 on PPC, $50 on mailed flyers, and you’ll have $100 in your pocket. Your CAC is $75 (150 for each of your customers).

This is a simple explanation of the cost of acquisition calculator. The formula looks like this:

You’ll notice that we asked you to add most of the core inputs to the CAC formula. However, you can easily separate CAC by channel by dividing total expenditures on each channel by the number customers it produced.

Why customer lifetime value (LTV), is important

To make a business viable, your revenue from customers MUST exceed the money you spent to acquire them.

This is why you should combine CAC and LTV \(and why it was done above). It’s a measure of profitability.

This is a common business strategy. people will buy cars very rarely, so the total value of a customer is likely to be the profit on one vehicle.

Example 1: an auto dealership

Let’s say that an auto dealership sells ten cars per week and never gets any repeat business.

Each car costs $15,000 and the dealer makes $3,000 profit on each vehicle. This gives her a gross profit total of $30,000.

The dealer spends $25,000 every week on newspaper ads to maintain that flow of car-buying customers.

Divide that $25,000 by the ten customers and her CAC is now $2500.

This is a smaller margin than we might have expected based on weekly revenues of $150,000. Because of the high CAC, her weekly profits are only $5000.

Or $500 per unit.

for most businesses, however, customers will purchase more than one time – whether they visit a store frequently or pay monthly on a creditcard (as with SaaS businesses).

the CAC calculation is now more complicated as we need to calculate the customer’s lifetime value (or customer lifetime value… or LTV/CLTV).

LTV is the following For SaaS businesses:

Example 2: A SaaS business

Let’s say that a SaaS company keeps its customers for 12 consecutive months.

Their customers now pay them $100 per month on average. This means that they will average $1200 over the life of the customer.

Imagine that the company spent $1000 in marketing efforts and related expenses during the last month and acquired five customers, which made their CAC $200.

These two numbers (assuming that the LTV doesn’t change) can be used to infer profitability per customer of $1000.

there may be other ways to calculate the total value of a customer’s time with a company or product. However, our method is the most accurate and reliable way to do so.

CAC gotchas

There are a few things you need to know If you want CAC calculations that go beyond the simple calculator.

First, CAC can take a LONG time to sell. It could take three months for someone to see your ads and then buy the car. If you are comparing a month’s worth marketing expenses to the month of sales, then you are doing something wrong.

Secondly, there are many costs that traditional formulas and calculators don’t consider. we’ve tried to include some of these in the calculator but we won’t have considered all of them.

you need to include associated costs like staff time, subscriptions for products related to marketing (webhosting, for example), and any other hidden expenses such discount codes you offer in promotional materials, or support time spent supporting someone who has taken a test drive or free trial.

There are many factors to consider when calculating customer acquisition costs.

Third, you will need to get to know your customers well.

This is especially problematic for bricks-and-mortar businesses that don’t know when customers first visited their store or how many times they’ll return. (see the Starbucks example above).

In your CAC calculations, you will need to decide how to treat repeat customers. We’d recommend discounting them entirely and going with the flow. This will be covered in more detail in the next section.

What about repeat customers who are influenced by the same marketing campaign?

when working with lifetime value, a common question is how to deal’reactivated’ customers by marketing.

Imagine a $100 advertisement for a bakery in a local paper. It results in two new customers and spurs a customer who hasn’t bought in the last two years to buy again. How can we handle this?

CAC is the cost of acquiring a new customer. For those who prefer to only consider new customers, repeat customers should be ignored.

In reality, This is not a fair computation. Most businesses will allocate some of their ads spend as “reactivation” spend. the total bill for the advert might be $100, but the CAC is $50. This is because the ad used to acquire these new customers is now $90.

It is difficult to know how much discount to give, especially offline. It’s almost impossible to know if x% of your readership has visited the bakery. You’ll have to guess.

Online, it is easier to determine if a visitor has been to the site before as most decent analytics software can track this information.

Google Analytics New vs. Returning Report

If a $100 Facebook advertising campaign produced the same results, it would be fairly easy to see that 20% of the traffic had visited before. Therefore, only $80 should be considered ‘new’ CAC spending (giving us a CAC value of $40).

Improve customer acquisition costs and customer lifetime value 

Basic maths tells me that there are two ways to improve a business’s metrics: reducing the CAC and increasing the lifetime value of the client.

To improve CAC, optimize marketing costs, reduce waste channels, improve targeting, use more free or lower-cost distribution methods (e.g. viral content, partnerships, or freemium offers) or reduce the number of hours-per-deal (to reduce people costs).

Online businesses can increase CAC by increasing site conversion rates. This is far more efficient than optimizing marketing costs.

at a 5% conversion rate, 50 people can become customers for every 1000 visitors. A visitor will spend $3 on average. That’s a CAC for $60 per customer.

The input states that, at a 6% conversion rate, 60 people will become customers per 1000 visitors. If the CAC drops to $50 instantly, this would represent a 16% drop. The input argues that This is a better way to increase CAC than cutting marketing spend by 16%.

There are many Ways to improve CAC

  1. Increase marketing spend efficiency
  2. Product virality can be increased
  3. Reduce marketing and sales expenses
  4. Optimization of conversion

It’s not easy to improve lifetime value. This metric speaks to the quality and importance of your customer relationship and your business to them.

Customer retention, also known as increasing the customer’s ‘life’, is one way to improve lifetime value. stop a customer churning too soon and they’ll spend more throughout their lives.

the best businesses balance increased retention with increased spending – continually upselling over time so that customers become more valuable to the company.

This is what you can see if you sign up for a “starter” bank account as a teenager, and then apply for a mortgage loan from the same bank 20 years later. Because they have very little in the way of deposits and no borrowing costs, teenagers are almost as valuable as bank clients.

However, keeping that teenager around until they can take out a $xxxxxxx loan is smart. This is why banks invest so heavily in stores like these to appeal to these young adults.

Conclusion 

Thank you for reading our guide on the  Cost of Acquisition Calculator. Hope you’ve found it help[ful.

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