The Customer Acquisition Cost is basically based on the resources a company/ business has to spend in order to acquire a brand-new customer. The customer acquisition process includes everything from manufacturing and up to marketing/ advertising.
Naturally, among the marketing stage of the entire process, many more expenses can come up – and those are still taken into account when calculating the Customer Acquisition Cost metric.
How to Calculate Customer Acquisition Cost
The Customer Acquisition Cost is made of three variables, all of which have to be taken into account and understood when trying to come up with the final result of this metric.
Namely, we have the Cost per Lead (CPL), the Touch Cost, and the Conversion Rates which apply during each stage of the sales process. With these variables, you can round up the Customer Acquisition Cost metric – which can offer you plenty of information in terms of conversions and sales process cost.
The Formula
Basically, the Customer Acquisition Cost is calculated by adding the CPL per Customer and the Touch Costs per Customer together and then multiplying this by the specific Conversion Rate.
There is also an alternate, perhaps easier way to calculate this metric – all you have to do is make the sum of your Sales and Marketing Expenses and then divide the final result by the number of customers you have acquired in a certain period.
Metric Dependencies
Before calculating the Customer Acquisition Cost only, it’s important to know that the information this metric gives to the business/ company owner is almost useless if the Customer Lifetime Value metric is not taken into account. The later simply means a business’ ability to monetize one of its customers – even though companies take up a different strategy when working with their customers, it’s common that they will have a higher Customer Acquisition Cost if the product is more expensive.
Metric Uses
In short, the Customer Acquisition Cost Metric is quite important to a company/ business when paired with the Return on Investment – by rounding up the Customer Acquisition Cost, the company tries to calculate the value of one of its customers and how much will that consumer contribute on the ROI of acquisition.
Naturally, this metric allows a company to see how much it can actually spend on earning a new customer – and this, of course, in a profitable way. Better said, the Customer Acquisition Cost determines how valuable is a customer to the company/ business.
When taking into account both the Customer Lifetime Value and Customer Acquisition Cost, the goal of every single business is to minimize the latter while maximizing the first metric.
Furthermore, the ratio between these two metrics should be at least higher than 3 – in the best case, and if possible, the company/ business should aim for a ratio of 7 or even 8.
Moreover, the Customer Acquisition Metric seems to have become a rather vital metric, especially due to the increasing industry, so to say, of online advertising – a type of advertising meant to boost up a company’s number of customers.