The Cost of Customer Acquisition: A Number that Every CEO Should Know
Running a business involves interpreting a lot of numbers. There are expenses to track, salaries to be paid (including your own!), and profit margins to be calculated.
Amidst all these equations, do you know the cost of acquiring a single customer?
Knowing your customer acquisition cost can help you analyze, modify and propel your sales and marketing strategies in the right direction. That said, avoiding the analysis and fine-tuning of your lead generation costs is very dangerous.
So how do you calculate this all-important number?
Calculating Customer Acquisition Cost (CAC)
Most finance experts agree that the cost of customer acquisition is the entire cost of sales and marketing for a given period, including your sales force headcount, commissions paid, and sales and marketing expenses, all divided by your number of paying clients. Here’s that equation in a more visual way:
Sales & Marketing Costs (i.e. Headcount + Commissions Paid + Media & Misc. Expenses)
Number of Paying Customers in a Given Period
Customer Acquisition Cost (CAC)
Still confused? Here’s a quick example to better explain this concept in its simplest form:
A House Painting Business
Imagine you own a house painting business. You spend $1,000 per month on marketing your painting services all over town via flyers, postcards, yard signs, and Facebook ads.
You have two salespeople working for you that you pay $1,500 twice a month including commissions.
In one 3-month summer season, your team paints 50 houses at $2,500 each.
So what’s your CAC for all that work?
$3,000 (marketing materials)
$18,000 (salaries for salespeople over 3 months)
$21,000 in costs / 50 paying customers = a CAC of $402.50
Your cost of customer acquisition is $402.50.
Once you see and internalize the cost of acquiring a customer, you might challenge your previous decisions about your sales and marketing techniques or about what you charge your customers for your products or services.
Consider the house painting business example above:
To ensure you’re making enough money to keep your business growing (and can afford to pay yourself, your overhead and taxes, not included here), you need to ensure you’re charging enough for your services so you can maintain required margin.
For example, if you’re charging your customers $2,500 to paint their homes, and your cost of labor for each house is $1,200, with a cost of customer acquisition of $402.40, you’re earning $897.50 in profit per job that your team completes.
$2,500 sale – $1,200 cost of labor – $402.50 cost of acquisition = $897.50 profit per house
It can be hard to derive what to spend on customer acquisition, but in the end, you will make more efficient decisions by going back over your past numbers, researching alternatives, and experimentation.
The results of your CAC can help you challenge the status quo and break legacy or traditional methods previously being used in your company. The more you know, the more profitable you can become. I highly recommend that you include the cost of customer acquisition in your monthly Key Performance Indicator report.
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