Cost of Acquisition: What it Means
Investopedia defines the cost of acquisition as the total expense incurred by a business in acquiring a new client or purchasing an asset. An accountant will list a company's acquisition cost as the total after any discounts are added and any closing or transaction costs are deducted.
This is the total cost of acquiring a new customer, including all marketing and sales expenses. It can be calculated by dividing the total cost of sales and marketing efforts by the number of new customers.
Customer acquisition costs can cost up to 7 times more than selling to existing customers. Additionally, the probability of successfully selling to a new customer lies between 5 to 20 percent, whereas the likelihood of successfully selling to an existing customer lies between 60 to 70 percent.
How to calculate customer acquisition cost
The first step in calculating customer acquisition cost is determining the reporting period. Businesses typically calculate customer acquisition costs monthly, quarterly or annually.
The formula for customer acquisition cost is the following:
Purchase price of the item
Costs to ship it to its point of use
Costs to install the item
Costs to get it up and running (in the case of equipment) or ready for sale (in the case of inventory) condition
Calculate CAC by dividing the total expenses to acquire customers (cost of sales and marketing) by the total number of customers acquired over a given time. Effectively calculating CAC falls into two categories: simple and complex.
Here’s the simple method for calculating CAC:
CAC = MCC ÷ CA
MCC: Total marketing campaign costs related to the acquisition
CA: Total customers acquired
Here’s the complex method for calculating CAC: CAC = (MCC + W + S + PS + O) ÷ CA
MCC: Total marketing campaign costs related to acquisition
W: Wages associated with marketing and sales
S: The cost of all marketing and sales software
PS: Any additional professional services (e.g., consultants) used in marketing/sales
CA: Total customers acquired
Customer Acquisition Cost, or CAC in marketing, refers to the total resources and costs incurred for acquiring a new customer. Hence, it includes all the marketing and sales costs incurred over a specific period to reach new customers.
This includes and is not limited to program and marketing spending, salaries, commission, bonuses, and overhead costs. These costs are associated with attracting new leads and converting them into customers.
CAC has become a critical business metric that businesses try to reduce as much as possible to increase their revenue or net profit ratio because it reflects the health of your business’s sales, marketing, and customer service programs.
CAC is not used individually but rather for more comprehensive insights, it is used alongside Customer Lifetime Value (CLTV)- which measures the value that the new customer will generate.
3 Tips to Reduce CAC
Here are three customer-centric tips to help you reduce Customer Acquisition Costs and optimize profits:
Know your customer. Knowing your customer’s wants and needs help you create a product that will delight them.
Engage customers early. Earlier product engagement lowers acquisition costs per customer.
Keep them coming back. Create a positive customer experience because acquiring a new user is much more expensive than keeping an existing one.