Customer Acquisition Cost

Rafat Abushaban

- Finance #  O 2.2K views   اقرأ بالعربية

Summary:Customer Acquisition Cost determines how easy is it to acquire a new customer to a business

Customer Acquisition Cost (CAC) helps business owners determine the cost of acquiring a new customer to a business. Simply put, it means how much will it cost to generate a single sale for a customer.

Customer Acquisition Explained


Business doesn't start with customers from day one. In order to succeed, a business must first identify a segment in the market to target in the form of customer profile. Once identified, this target customer is approached to see if they are open to receive the offer or not, making this person a "lead". Leads are not every one in the market, but they are people whom the business already has a connection with, but are not a source of income generation yet.
Customer funnel
Once a lead buys the products/services being offered, this lead becomes a customer. If this customer buys again or buys again, then he/she becomes a repeated customer. CAC measures how much it costs for this customer to transform from being a lead towards becoming a paying customer.

The following equation helps identify how CAC can be calculated.

Customer Acquisition Cost Total cost of sales and marketing
Number of customers acquired

In practice, CAC is not usually a single number, but can be calculated across channels, products, and even industries.

CAC Example


A business with $10,000 total cost of sales and marketing and 200 customers has CAC rated as follows:

CAC10,000
200

This means that each customer costs $50 to acquire.

Customer Acquisition and Online Ads


CAC is an essential measure for businesses in general, and especially for startups online utilizing ad campaigns across platforms to attract customers. Calculating CAC correctly can help startups greatly understand the effectiveness of their ad campaigns. Take the following example: A startup is advertising 3 lines of new products, (Let's call them A, B, and C) with 3 separate ad campaigns on Facebook for 1 week concurrently. Let's assume that all our products are targeted towards the same geographic area: Egypt.
 
After this week, we found the following results:

  • Product A has received 2,500 clicks at a Cost Per Click (CPC) of $0.5, bringing the total cost to $1250.
    Note that the total cost here is the cost of the campaign, not the CAC. In order to estimate CAC we need to know how many of those clicks (leads) resulted in an actual purchase. Let's say we have unique 10 orders for product A. Thus, CAC for product A is found to be $125 calculated as follows:
    CAC(A)1,250
    10
  • Product B has received 1,200 clicks at a Cost Per Click (CPC) of $0.5, bringing the total cost to $600. The actual unique orders for product B were 3.
    Thus, CAC for product B is found to be $200 calculated as follows:
    CAC(B)600
    3
  • Product C has received 3,000 clicks at a Cost Per Click (CPC) of $0.5, bringing the total cost to $1,500. The actual unique orders for product C were 30.
    Thus, CAC for product C is found to be $100 calculated as follows:
    CAC(B)3,000
    30

So, we have the following: CACA = $125, CACB = $200, and CACC = $100. This tells us that the best CAC was for product C, which means that either the campaign was setup better than the others, or that product C is in demand more than A and B. As you see, this requires a little playing around editing and modifying products and ad campaigns to understand which is true. If we then establish that product C is superior, we should focus on it. Otherwise, if the difference was in the ad copy or the campaign setup itself, we might need to adopt the ad copy template for product C across other lines.

Facebook, for instance, offers a good tool to help in finding the reasons behind this variation called A/B test. A/B Test allows the administrator compare between up to 5 different ad campaigns to find underlying differences and how results could be better at cheaper prices.
If the issue is with the ad copy, we can change a few factors, including geographic region, target audience age or interests.

More details on how to calculate CAC in more complex and realistic scenarios check the links in references