{"id":8143,"date":"2023-03-09T07:20:00","date_gmt":"2023-06-06T07:20:19","guid":{"rendered":"https:\/\/www.salesforce.com\/?p=8143"},"modified":"2023-06-16T03:04:25","modified_gmt":"2023-06-16T03:04:25","slug":"customer-acquisition-cost","status":"publish","type":"post","link":"https:\/\/www.salesforce.com\/in\/blog\/customer-acquisition-cost\/","title":{"rendered":"Complete Guide to Calculating and Reducing Customer Acquisition Cost"},"content":{"rendered":"\n

Customer Acquisition Cost (CAC) is more than just a buzzword. It is an essential customer metric to track in today\u2019s hybrid business models. For example, consider this \u2013 as a business, you recently engaged an influencer to promote your services on social media, and the response has been great.<\/p>\n\n\n\n

But are you able to objectively define \u2018great\u2019? Can you accurately track responses and return on investment (ROI) on this marketing campaign? Can you put a number on how much it ultimately cost you to influence someone to buy your services as a direct result of this campaign?<\/p>\n\n\n\n

Most importantly, can you reduce the CAC and optimise spending while driving ROI?<\/p>\n\n\n\n

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27% decrease in customer acquisition costs<\/span><\/h2>\n\t\t\t\t\t\t\t

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Let\u2019s explore how calculating CAC will help you scale your business and acquire more customers whilst maximising profits. Let\u2019s begin by breaking down the basics. <\/p>\n\n\n\n

What is Customer Acquisition Cost? <\/span> <\/h2>\n\n\n\n

Customer Acquisition Cost (CAC) is a metric that allows companies to measure the cost of acquiring a new customer. Clubbed alongside the customer lifetime value (LTV) metric, tracking CAC helps businesses measure the value generated by a new customer.<\/p>\n\n\n\n

The metric involves considering all the expenses incurred while convincing customers to purchase products or services a business offers. This includes time and investment made on research, marketing, and advertising. Ultimately, enabling businesses to calculate the ROI of customer acquisition.<\/p>\n\n\n\n

The resultant figures can help businesses make data-driven decisions on how much resources they need to spend on acquiring a particular customer.<\/p>\n\n\n\n

How to calculate customer acquisition cost (CAC) <\/span> <\/h2>\n\n\n\n

Once you have determined the reporting period for calculation (monthly, quarterly, or annually), you can apply the below formula: (Sales + Marketing Expenses) \/ Number of new customers acquired = Customer Acquisition Cost. <\/p>\n\n\n\n

Note that<\/p>\n\n\n\n

– The values in both fields must be within the reporting period selected<\/p>\n\n\n\n

– In order to arrive at an accurate assessment of customer acquisition cost, sales and marketing expenses should also include indirect expenses like employee bonuses and commissions.<\/p>\n\n\n\n

Customer acquisition cost example <\/span> <\/h2>\n\n\n\n

Let\u2019s take a look at two examples of how you can calculate CAC. <\/p>\n\n\n\n

Example one: Retail <\/span> <\/h3>\n\n\n\n

Assume that you run a retail store that sells bags. Last month, you spent a total of INR 16,00,000 on sales and marketing-related expenditures. This expenditure included paying your sales personnel, running training programs for the new employees, and executing an in-store influencer campaign to attract customers to the store.<\/p>\n\n\n\n

As a result of your sales and marketing efforts last month, your store reported that new customers bought 250 bags. Your Customer Acquisition Cost is, therefore, INR 6,400.<\/p>\n\n\n\n

INR 16,00,000 \/ 250 = INR 6,400<\/p>\n\n\n\n

Example two: IT Services <\/span> <\/h2>\n\n\n\n

As a help desk service provider, you have over 50 sales reps who help you close deals and acquire customers. Besides the expenses incurred for their salaries and bonuses, you also rank high on search engine platforms for \u201chelp desk service\u201d and spend about INR 1,00,000 a month on Google Ads.

Last month, your sales reps signed up 60 new customers (each customer\u2019s lifetime value, according to the company\u2019s customer retention calculation, is INR 10,00,000. Here\u2019s what all of this means:

Total salaries for sales personnel: INR 14,00,000
Total spend on search engines: INR 1,00,000

Total sales and marketing expenses = INR 15,00,000
New customers acquired in a month = 60

Total Customer Acquisition Cost = 15,00,000\/60 = INR 25,000

Customer Value or Retention = INR 10,00,000. Therefore, for every investment of INR 25,000, you can generate a revenue of INR 10,00,000. <\/p>\n\n\n\n

Why is Customer Acquisition Cost Important? <\/span> <\/h2>\n\n\n\n

CAC is an important metric that helps you evaluate the performance of your sales and marketing campaigns. Determining your ROI on sales and marketing will enable you to make data-driven decisions on customer acquisition and customer retention<\/a>.<\/p>\n\n\n\n

As with the examples above, determining that for every investment of INR 25,000, you can generate up to INR 10,00,000 in revenue demonstrates the effectiveness of your sales and marketing functions.<\/p>\n\n\n\n

More importantly, once you calculate and understand the costs of acquiring a new customer, you can fine-tune these expenses and reduce them to boost ROI.<\/p>\n\n\n\n

You can even track CAC channel by channel. If you use multiple channels to acquire new customers, you can use CAC to determine how each channel performs and choose to invest more in ones that fare well. For example, the cost of acquiring a new customer could be higher via in-store campaigns than social media campaigns. In that case, you can pivot funds to social media to maximise returns.<\/p>\n\n\n\n

Ultimately, understanding CAC helps maximise profits and profitability. For example, Silver Arrows, a franchise partner and dealer for Mercedes-Benz, drove down the cost per conversion by nearly 33% and increased revenue by INR 20,00,000 per month through data-driven marketing. By accessing performance data in real-time<\/a>, the brand was able to continually fine-tune its marketing campaign for maximum impact.<\/p>\n\n\n\n

How to use CAC effectively: Pair it up with Customer Lifetime Value (LTV) <\/span> <\/h2>\n\n\n\n

CAC is an effective business metric that can help evaluate sales and marketing efforts. However, in order to make the most out of CAC, we recommend combining the metric with Customer Lifetime Value (CLV). Customer lifetime value is a metric that predicts how much total revenue a customer can be expected to generate for a business.<\/p>\n\n\n\n

Here\u2019s what you need to arrive at before you calculate your customer lifetime value (CLV)<\/p>\n\n\n\n

Average order value<\/b>: Calculate this number by dividing your company’s total revenue in a time period by the number of orders over the course of that same period.<\/p>\n\n\n\n

Average order frequency<\/b>: Calculate this number by dividing the number of orders over the time period by the number of unique customers who placed the orders during that period.<\/p>\n\n\n\n

Average customer lifespan<\/b>: Calculate this number by averaging the years a customer continues to place orders from your company.<\/p>\n\n\n\n

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To calculate the CLV:<\/p>\n\n\n\n