Do you know much you spend to hook a new customer?
The metric to figure out how much it costs you to acquire one new customer is called Customer Acquisition Cost (CAC) and here we will guide you through how to calculate it and why it is important, so read on! Fishing for customers? Unless you run a business where you rely simply on word of mouth to obtain new customers, you must invest money in sales and marketing to capture new customers. But have you ever actually calculated your customer acquisition cost to get ONE new customer? Knowing it could clarify difficult decisions on where and how to invest your money.
Since acquiring a new customer is the job of both the Sales and Marketing teams, the formula to figure the cost of acquiring a new customer must include the expenditures of both teams.
Calculating CAC: Take your total sales and marketing spendings for a specific time period and divide by the number of new customers for that time period.
Sales and Marketing Cost = Program and advertising spend + salaries + commissions and bonuses + overheard in a month, quarter, or year
New Customers = Number of new customers in a month, quarter, or year
Formula: Sales and Marketing Cost / New Customers = CAC
Let’s Look at an Example:
A company spends $10,000 on salaries for their sales team, $15,000 on salaries of their marketing team and $5,000 on online advertising in one month. On average, they acquire 10 new customers a month.
Monthy Sales and Marketing Cost = $10,000 + $15,000 + 5,000 = $30,000
New Customers in a Month = 10
CAC = $30,000/10 = $3,000 per customer
What Does it Mean?
It means that to get a new customer, the company has to spend $3,000. This number is different for every industry, but no matter what, you want a low average CAC. An increase in CAC means that you are spending comparatively more for each new customer, which can imply there’s a problem with your sales or marketing efficiency.
Why should I care?
For example, if you are in the tech industry and have a new version of your software getting ready to launch, CAC may help you determine whether it is worth spending money on sales and marketing at the moment, or put the money into development to push out the new version ASAP, and only then focus on selling and marketing it.
Did you find this article helpful? Click here to learn how to calculate what % of your CAC goes to marketing.
If you want to learn more useful marketing metrics, get our free “6 Marketing Metrics Your Boss Actually Cares About” eBook.