The emergence of trackable Internet companies and web-based advertising campaigns led to the growing use of matric Customer acquisition cost.

Traditionally, companies have to engage in a shotgun-style advertisement and look for methods to track customers through the decision-making process.

Nowadays, most web-based companies like AI Marketing companies in Pakistan engage in highly targeted campaigns, and tracking customers as they progress from interested leads to long-lasting loyal clients. In this atmosphere, Customer Acquisition Cost or “CAC” is used by both investors and companies.

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As you probably heard of, Customer Acquisition Cost is the cost of convincing a potential client to buy the product or services. In this blog, we will elaborate on the Customer Acquisition Cost metric in more detail, how you can measure it, and what steps you can take to improve it.

Checking customer acquisition cost

Read more about: Customer acquisition vs Customer retention: Which is best for growth?

What the Customer Acquisition Cost Metric Means to You

As narrated earlier, the Customer Acquisition Cost metric is of sheer importance to two kinds of parties: companies and investors. The first party includes early-stage, outside investors who use it to analyze the new internet technology companies’ scalability.

They can find the company’s profitability by merely looking at the difference between how much money can be an extract from customers and the cost of removing it.

For example, suppose we look at it as an upstream oil market. In that case, if an oil supply is in an area requiring massive infrastructure investment, the amount applied to extract the oil will be more significant than the price per barrel in the market.

Investors look at Internet-based companies through the same lens. They are only concerned with the current relationship, not on the future promises of bringing improvements in the metric unless they can be justified.

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The other party that is interested in the metric is an internal operation or marketing specialist. They need it to optimize the return on their advertising investments. In other words, if the cost to extract money is reduced, the company’s profit margin will increase, making a more massive profit.

How You Can Measure Customer Acquisition Cost

Customer Acquisition Cost can be calculated through a reasonably simple mathematical method – dividing all the cost spent on acquiring more customers ( marketing expense ) by the total number of clients you managed to achieve in the period the money was spent.

For example, if the company spent $150 on marketing in a year and acquired 150 customers the same year, their Customer Acquisition Cost will be $1.0.

There are some caveats about applying this metric that you should be aware of when using it. For instance, a company invested in marketing in the early stages of SEO or a new region that it is not expecting to see the results from until a later period. Although these occurrences are pretty rare, they may cloud the relationship while calculating the Customer Acquisition Cost.

We suggest that you run multiple variations to account for these situations. However, here we will provide some examples of calculating the Customer Acquisition Cost in its most pragmatic yet straightforward form with two examples. The first company (example 1) has a flawed metric while the second (example 2) has an excellent one.

Example 1: An Ecommerce Company

In this example, we take a fictitious eCommerce company that sells beauty products. Say the company spent $500,000 on advertising last month, and its marketing team says 50,000 new orders were place in the month. It suggests a Customer Acquisition Cost of $10; a figure bears no meaning in itself.

Suppose a Mercedes dealer has a Customer Acquisition Cost of $10. The management will be delighted while looking at the year’s financial statements.

However, in our company’s case, the average order placed by the customer is $25.00, and it has a markup of $100 on all its products. It means that, on average, the company makes $12.50 per sale while generating $2.50 from each customer to pay for office space, web hosting, salaries, and other general expenses.

While this is a dirty and quick calculation, what will happen if the clients make more than one purchase over their lifetime? What if they give up the idea of shopping from the brick-and-mortar store and start buying only from this company?

Customer lifetime value is specifically (CLV) designed to resolve situations like this. You can find a CLV calculator by searching on your favorite search engine. In general, this metric will help you get a more accurate understanding of what Customer Acquisition Cost means to your online business.

Factually, a $10.00 Customer Acquisition Cost cost may be relatively low if customers make a $25.00 purchase every week for 20 years. That’s a long way to go. On the other hand, this eCommerce company is struggling to keep customers, and most of its customers are making only one purchase.

Example 2: An Online CRM (SaaS) Software Company

Think of a company that sells an online system for managing sales contact for customer relationship management. The cost of distributing the product is meager since it is cloud-based, and the clients need little or no support. 

Furthermore, the retention rate is reasonable because of the pain customers experience while uploading all the tasks. Such as their contacts and the event they are tracking onto a new CRM software.

The company has worked all its way up to the search engine thanks to its marketing team. Meanwhile, having an expert sales and support team working for minimum wage. It is based out of their call centers in a rural Midwestern town.

The company also enjoys the partnership of many strategic partners that provide a steady supply of customers. They spend only $2.00 acquiring a new client with a lifetime value crossing $2,000. Here are some maths.

  1. Total cost paid to strategic alliance partners per customer = $1.00
  2. The total cost of new customer sales support call center = $1,000,000/year 
  3. Total monthly expenditure on search engine optimization = $20,000/year

Total new customers generated in the year = 1,020,00

Customer Acquisition Cost = ($1,020,000 / 1,020,000 customers) + $1.00 per customer = $2.00

As in the example stated previously, the amount is worth only the money extracted from the customers. This company used a customer retention calculation to find that its customer lifetime value (CLV) is $2,000. It is suggesting that this company is turning a $2.00 investment into $2,000. It is attractive to investors and a signal to the marketing team that their system is right on track.

What about Customer Acquisition Cost per Marketing Channel

Creating customer acquisition strategies

Knowing the Customer Acquisition Cost for each of your marketing channels is something every marketer wants to know. If you determine which channel has the lowest Customer Acquisition Cost, you know where to double down your marketing expenses.

The more you will spend on the lower Customer Acquisition Cost channel. The more customers you can obtain for a fixed budget amount.

The most straightforward approach is to break out your spreadsheet and sum up all your marketing receipts for the year, month, or quarter (however you want to do it). Now add up the amount of each channel.

For example, all the money you spent on Google Adwords and Facebook advertisements will go down in the “PPC” or “Pay per Click” column. And your expense on SEO and blogging will be written under “Inbound Marketing Costs.”

Once you know how much you are spending on each channel. You can apply a simplistic formula and assume that each channel got the same amount of customers as the other channel. The only issue is that it can be challenging to know what channel is responsible for how many customers.

You can easily observe where this approach becomes futile. For example, you ran one Pay-per-Click advertisement for one day. You spent $10, and that’s all. When you go through the spreadsheet, you made it earlier. Pay-per-Click will appear the best marketing channel because of it’s extremely low Customer Acquisition Cost. 

For all the eCommerce companies that are selling physical products

It’s easy to know what Pay-per-Click advertisement leads to a direct sale. Due to a conversion tracking the advertising platform provides.

In this way, you can find that value and write it down on your spreadsheet. It will give you a clear idea of how effectively your Pay-per-Click campaigns are going relative to the rest of your marketing campaigns.

Furthermore, with different tools like customer analytics, you can trace paying customers back to their “last touch” attribution source. It means that you can see the last channel a client visited before making their first sale.

How You Can Improve Customer Acquisition Cost

Let’s face it; we all wish our company were like the one mentioned in 

Example 2.

In reality, our marketing campaigns can always get more attractive, customer loyalty can continuously be enhanced, and we can extract more from our consumers. Here are some methods you can use to improve its Customer Acquisition Cost in its industry.

Digital Marketing agencies in Pakistan have been doing a great job in this regard. They are readily available round the clock for any guidance and assistance.

Enhance User Value

Through a highly conceptual notion of “user value,” we mean the ability to generate something pleasing to clients. It may include the additional feature qualities /enhancements that consumers have expressed their interest. It can also be implementing something to improve the existing product or service, or coming up with new ways to make money from existing customers.

Implement Customer Relation Management

You may notice that nearly all successful companies that have repeat buyers implement any form of CRM. It may be automated email lists, blogs, loyalty programs, a dynamic sales team on a cloud-based sales tracking system, or other methods that captivate customers to stay loyal.

Improve On-site Conversion Metric

One may set up goals on Google Analytics and perform A/B split testing along with a new checkout mechanism. To reduce the shopping cart abandonment rate and improve the landing page, mobile optimization, site speed, and other factors enhance the website’s performance.

Wrapping Up

Customer Acquisition Cost is a great way to determine if you are on the right path to your online business’s success. It gives you an idea about your marketing strategies and how effective they are.

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