Running a small business is often very overwhelming for one person or a small team. Most people naturally just wish they could produce and sell their amazing product or service and that would be the end of it. However there are financial considerations such as Customer Acquisition Cost (CAC).
It’s all very exciting to design the logo, concept, website, and the colorful crinkle cut paper for the packaging. Little do we know that we will soon be spending more time doing accounting, taxes, profit margin calculations and dealing with endless delivery problems. Looking to understand your business’s fiscal balance by determining the break-even point to enhance its financial health and success? This comprehensive guide covers all you need to learn.
Do not worry though. We are here to make life easier for small and medium-sized business owners by providing detailed instructions on how to calculate profitability and optimize the desired outcome. If unlocking the secret to reaching your break-even point and enhancing your business’s profitability interests you, read on for a comprehensive guide tailored just for that.
We have yet another useful term that you’ll likely come across a lot if you’re running a small business: customer acquisition cost.
This is an important metric for small and medium-sized business owners who are trying to grow their customer base. The customer acquisition cost metric can be used to evaluate how much you are spending on marketing and advertising, so you can decide whether or not it’s worth all the work, time, and money spent.
What is Customer Acquisition Cost?
Let’s dive into what CAC is and how it’s calculated.
Customer Acquisition Cost (CAC) is a marketing term that is used to measure the cost of acquiring a new customer. It includes your costs of marketing and advertising, as well as any other expenses incurred in order to get a customer. To further explain, it is the sum of all marketing and sales expenses such as traditional advertising, online and social media ads, trade shows, influencer collaborations, the cost of PR agencies you work with, and so on, divided by the number of new customers acquired.
The customer acquisition cost is the key measure for evaluating the efficiency of a company’s marketing and sales efforts. It is calculated in a straightforward way and it is the kind of metric you want to stay on top of. Discover in this extensive guide how the Customer Acquisition Cost plays a crucial role alongside the cost of goods sold in shaping your business’s profitability and the strategies to optimize both effectively.
Your customer acquisition cost can be calculated by dividing total marketing and sales expenses by net new customers acquired during a specific time period. This metric can be calculated on an annual, quarterly, monthly, or daily basis depending on what data is available to your company.
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Customer Acquisition Cost (CAC) with Daily Examples
The good news is that it’s fairly easy and straightforward to calculate your CAC in its simplest form. In order to calculate your business’s customer acquisition cost, you must first determine your total marketing budget and your average customer lifetime value. Enhance the value of a customer’s life cycle with effective techniques, ensuring they remain loyal and increase their spending over time.
The formula can be found below:
To provide a simple example: if Company A spends $10k in advertising to acquire 100 new customers in 2022 and Company B spends $12k in advertising to acquire 100 new customers for the same year, then Company A has a lower cost of customer acquisition than Company B. Understanding your costs is essential; consider what portion of these expenses are consistent expenses that do not fluctuate with the number of customers acquired.
In another –this time daily- example, your company may be trying different ads on a variety of spaces. Say your Instagram ad is costing you $50 per day and your daily average sales include 10 brand new customers. $50 divided by 10 comes down to $5 spent per new customer.
On the other hand, your banner ad on a weather forecast website is costing your company $80 including the costs per click/per day and brings in 20 new customers. $80 divided by 20 new customers is $4 per new customer.
If the two ads above are compared, the second serves you better, bringing in more new clients at a lower cost. A plain CAC calculation is how you should be tracking your ad efficiency in order to be able to compare which works best.
Reach More People with Fewer Costs
For small and medium-sized business owners, new customer acquisition and retention play a key role. The longer-term goal should be to cut down your costs without giving up on product or service quality. Discover strategies to fine-tune your fixed expenses in this guide, ensuring you maintain quality while maximizing efficiency.
Small businesses’ products might be going through a less complicated supply chain from your hands to your customers’ homes. But if you don’t have a smooth system in place to deliver them, all the hard work and money you spend on well-thought-out and calculated costs of customer acquisition won’t help.
Utilizing smart systems that increase convenience for you and your customers at a fraction of the cost of your old/failed systems is the way to go. After all, what is the value of any product if it doesn’t make it to its customers on time, and with ease, right?
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