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Attracting new customers to your business while retaining your existing customer base is the key to sustainable growth. But we all know that new customer acquisition is more expensive than customer retention. The better equipped businesses are to quantify their customer acquisition costs, the better they will be able to factor these costs into their budget and ensure that they invest appropriately in customer acquisition as well as retention.
Here, we’ll look at what businesses need to know about taking control of their acquisition costs and growing their business without compromising their carefully balanced budgets or overspending on marketing channels that offer low returns on their investments.
CAC: Customer acquisition cost explained
Customer Acquisition Cost or CAC calculation enables businesses to identify how much they are spending on each newly acquired customer and therefore ascertain which marketing channels yield the most ROI.
For instance, let’s say you allocate £5,000 of your marketing spend this year to social media marketing. This includes a combination of paid ads and organic content marketing and encompasses the human resource costs for your marketing and any analytics tools or other overheads incurred.
Your combined social strategy yields 250 new customers. Therefore, your customer acquisition cost was £20 over the course of the year.
Customer acquisition cost is an important metric for businesses that determines the efficacy of their marketing strategy in attracting new customers. The lower their CAC, the more effective their marketing is in acquiring new customers.
Customer acquisition cost formula
The CAC formula is fairly straightforward. Simply combine the cost of sales and marketing and divide this figure by the number of new customers your efforts have acquired.
CAC = (cost of sales + cost of marketing) / new customer acquired
You can do this across your entire marketing spend or carry out separate calculations for each marketing channel to see which offers the best ROI. Here are a few examples of channels that your business may include in the formula above:
- Social media campaigns
- Paid advertising
- Email marketing
- Paid sales
- Marketing and sales employees
- Outdoor advertising such as billboards or signs
- SEO (search engine optimisation)
- In-person events such as pop-up shops, exhibitions or conferences
- Direct mail
CAC & marketing budget
By rule of thumb, companies that sell directly to consumers should aim to spend between 5% and 10% of their overall revenue on marketing while B2B companies should generally aim to spend 2-5% on marketing. Despite the grim realities of the economic climate, 39.5% of UK businesses expect to increase their marketing spend in 2023 and 2024, with only 15.3% anticipating spending cuts according to the most recent IPA Bellwether Report.
Across the country, savvy businesses are not hacking and slashing their marketing budgets. Still, they are looking more closely at how hard their marketing strategies are working for them, investing in areas with lower acquisition costs and higher ROI.
Customer acquisition cost and lifetime value
Businesses want new customers to be worth more to them than a single transaction. Therefore, CAC and customer lifetime value (LTV) are commonly used together to gauge the total revenue a business might expect from new customer relationships.
One popular formula for calculating this is as follows:
Customer Lifetime Value = (Annual Customer Value x Average Customer Lifespan in Years)
The customer value input above can be calculated by multiplying their average purchase value by the average number of purchases. Businesses can ascertain their LTV:CAC ratio by dividing LTV by CAC. This ratio is an effective way to analyse the long-term impact on your investments in customer acquisition. Businesses should aim for their LTV to be higher than their CAC, as this number represents the amount they spend to acquire a customer in relation to the amount of money a customer generates for the business. There are many ways to improve LTV from cross-selling and upselling to exclusive offers and personalised discount codes.
Square sellers can use their Square Dashboard to identify which are new and returning customers, and manage customer profiles through their Customer Directory – Square’s free CRM.
