The world has seen some serious advancements in every field and business is not very far away. Traditional ways of doing business are constantly being replaced by more responsive and efficient ones. To sum up, the argument, suffice it to say that you can now find a lot of literature on how to conduct your business successfully. Even a brief discussion of the metrics that provides a health check of your business is beyond the limitation of these lines. However, we can discuss a very particular metric that needs to be explored and applied further for the results it offers are quite helpful in managing a business efficiently.
CAC or customer acquisition cost is the amount you spend to acquire new customers within a specific period. It includes all your sales and marketing costs for their aim is only to get new customers. Companies looking to expand their customer base and increase their revenue in turn must be familiar with this concept as it can shut off various unproductive loopholes which are otherwise draining the profits. When we say the cost incurred during the customer acquisition we mean the totality of your spending on sales and marketing. More specifically, it includes commissions, salaries, and bonuses of your sales teams in addition to an assortment of overhead expenses. Optimum CAC which is projecting a downward slide and increasing sales/customers graph is a sign of healthy business activity. In other words, it means your sales/marketing department is doing what it is supposed to do. In cases of reversal or even the balance of CAC and new customers, serious revamps are warranted.
Components of CAC
As said earlier, CAC is a crucial metric for every business activity and its calculation should be periodic to ensure that you are not draining your profits. Below is provided an estimate of the factors which make up the CAC.
Employee Salaries
Employee salaries are a fact for every business and the satisfaction of your employees results in your business’s better performance. Good employees don’t come cheap and cheap employees don’t produce good results. So, a balance must be maintained between both. It is not advisable to just cut off your employees for the results can be pretty overwhelming. However, the use of marketing automation and chatbots can produce positive effects on your CAC.
Technical Costs
All kinds of technical tools you acquire for marketing or sales fall within the customer acquisition expenses whether they are new software or anything else.
Advertisement Costs
This is the most obvious one. You can’t get access to customers without spending some on ads. All kinds of social media and physical ads are counted here and add up to your acquisition costs. This factor alone contributes to the biggest hike in your acquisition costs, sometimes even surpassing employees’ wages.
Production Costs
By this, we mean the money you spend to produce something physically. Consider you are a clothing business and you have to create videos of your products to amplify their appeal. So, to create a video you need a set, models, cameras, and the like. This all makes up for the production costs. If you are outsourcing editing or shooting services, the costs incurred are also to be added to the final CAC.
Miscellaneous Expenses
Various kinds of overhead expenses fall within this category. Companies selling physical products are somewhat increased than others as they have to pay up for utilities, storage, transportation, etc. Even if you are a services company, you still draw inventory charges like updating your computers and stuff.
How to Calculate CAC?
The easiest way to calculate your CAC is to make a list of all the costs. Just like budgeting, it is essential that you demarcate a timeframe. Say a whole financial year. Or you can do it on a quarterly/monthly basis at your convenience. This will narrow down your scope making the process more feasible.
Next, you bring out your ledgers and make a list of all the costs. Be careful at this step as failing to enlist all expenditures will not produce actual results. After this, you have to divide all the costs by the new customers you have acquired within the specified time to which the data belongs.
The figure you obtain will be your customer acquisition cost and since all the costs have been included, the chances of any miscalculation are minimal. You can then use this data as a check of your current business strategy and changes can be made in its light.