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Customer Acquisition Cost: “The One Thing That Can Determine Your Company's Future” - Floyd Baker
Calculating your Customer Acquisition Cost
The CAC is easy to calculate: It's a company's total marketing and sales costs divided by the number of newly acquired customers in the same period. If a company spent $1,000 on marketing and acquired 10 new customers, its CAC would be $100.
Marketing + Sales
Newly acquired customers
What is a good Customer Acquisition Cost ratio?
A good reference point is to aim for the Customers Lifetime Value (the total net profit a company makes from any given customer) to be three times the CAC (i.e. have a 3:1 ratio). If the ratio is closer to 1:1, you are spending too much on marketing and may need to re-evaluate your target market or adjust your product and service offerings. If it's 5:1 you are spending too little, and in fact, probably significantly missing out on business and increased profitability.
Why is Customer Acquisition Cost important?
CAC allows businesses to directly correlate the value of each newly acquired customer and to calculate the resulting ROI of an acquisition. Ultimately allowing you to maximize the profitability of your business with effective advertising!