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The Importance of Customer Acquisition Cost

Most entrepreneurs can agree that there is no business without marketing. Every company has some sort of marketing expense. There really is no way to scale without it. Many businesses thrive off free services such as social media, however, there is still a cost associated with the labor and time required to really push social media to it’s fullest potential. Therefore, marketing, and the cost thereof, is a necessary component to the ability of any company to grow.

But just as important as the marketing itself, is a company’s ability to track and control it’s marketing expense. If there is no way to ensure that your efforts are actually successful, then you may as well just throw the money away. This is where your Customer Acquisition Cost (CAC) calculation comes in. According to kissmetrics:

CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. For example, if a company spent $100 on marketing in a year and acquired 100 customers in the same year, their CAC is $1.00.

This is a key metric in ensuring that your marketing is actually bringing in customers and that you aren’t “overpaying” for these customers. If you sell a product that costs $100 but your CAC is also $100, you are breaking even and potentially even losing money. Minimizing your customer acquisition cost should be one of your main goals within your marketing strategy.

Customer Acquisition Cost & eCommerce

CAC is a metric that is most widely used in the eCommerce world. eCommerce companies sell products online, usually for a fixed price. Controlling the customer acquisition cost and keeping it to a minimum will determine the profit generated from each sale. With the amount of robust digital marketing platforms that exist today, it is very easy for eCommerce businesses to engage in highly targeted campaigns which allow them to measure conversion rates.

Customer acquisition cost will also vary from industry to industry. A company that sells diapers for an average of $20 per order must have a much lower CAC than for example, a car dealership with an average order of $30,000. It is up to the marketers to establish this metric and set goals around them.

Customer Acquisition Cost & Service Based Businesses

Businesses that provide a service have a much more difficult time tracking the effectiveness of their marketing. Since there usually is no “direct response” like there would be in eCommerce (i.e. prospect clicks on an ad and purchases a product on the spot), there is no clear cut way to measure your customer acquisition cost. Another huge factor in the service industry is that prospects will potentially become longer term clients. In the web design business for example, clients tend to stay for years at a time, therefore it is difficult to determine customer acquisition cost when the lifetime value of a customer is not easily calculated upfront.

Service based businesses tend to benefit more from strategies such as content marketing, which provide a longer tail marketing life cycle, however, the same issues regarding the tracking of performance still apply. It is hard to put a price on your customer acquisition where there is uncertainty as to the lifetime value of that customer. It is also difficult to track whether your customer came to you from an ad they saw, a newsletter you sent out, or word of mouth. With eCommerce, it is very black and white, but with service based businesses, it is a lot more complex.

Control The Cost of Marketing

Regardless of what industry you are in, there is one common denominator. Being in control of your marketing cost will either make or break you. Savvy marketers will always have this in the back of their minds, and should continuously put mechanisms in place that both control the cost, and measure performance of every marketing dollar spent. That is the essence of digital marketing.