(extracted from Ojijo’s Sell Something: 5 Steps to Entrepreneurship)
Customer Acquisition Cost (abbreviated to CAC) refers to the resources that a business must allocate (financial or otherwise) in order to acquire an additional customers. This cost is incurred by the organization to convince a potential customer. It includes all costs leading to the customer to know about the product, get the product, and purchase the product.
However, this cost is exclusive of the product cost as well as the cost involved in research, marketing, and accessibility costs.
This is an important business metric. It plays a major role in calculating the value of the customer to the company and the resulting return on investment (ROI) of acquisition.
Customer Acquisition Cost will typically increase as a business matures. It is also typical to see a diminishing return on CAC as a business grows in size and possibly geographical distribution. At some point, a given customer acquisition strategy will no longer be beneficial – this means that the financial rate of return that can be expected to accompany new customers is surpassed by the cost of acquiring those customers in the first place. Most businesses wisely choose to adopt a different strategy for customer acquisition, before this point is reached.
A clear analysis of CAC leads to leverage synergies across platforms to produce the best results. The old business adage goes,
“You can’t manage what you don’t measure.”
ق The Formula for Customer Acquisition Cost
To measure the CAC, I need to know the projected costs, or past costs, of ALL ACTIVITIES that lead to a customer paying for our product. These are the marketing activities, and they include:
Corporate Branding (Public Relations and Corporate Communications): These include costs for services to promote the visibility of company name, image, and colours, and services. They include costs for public relations fees, Profile/Bronchure, Calendars, adverts, e-Newslettersor (e-zine), Press Releases, Diaries, and Websites.
Marketing Tools: These include costs associated with branding, advertising, and promotion of the brand, including introduction Letters, Curriculum, emails, stickers, identify documents, Business Cards , etc.
Promotion (Advertising): These include expenses to promote the product, including discounts, offers, advertisement like social media (facebook, google plus, linkedin, emails sent, etc), sms, radio talks/mentions, tv adverts, sales presentations (transport), phone calls.
Corporate Social Responsibility (CSR): These include all costs for services offered for free, to give back to the community, and strategically, promote the company’s brand.
Direct Marketing Expenses: These include such expenses as transport to visit clients or potential clients, customer retention through such things as lunches, entertainment, gifts, and vouchers, as well as related expenses of meals and accommodation when meeting clients.
The sum total of all the above is the Total Customer Acquisition Costs.
To get the cost of acquiring one customer, I need to divide this number by the actual or projected number of customers.
For instance, if the total costs above is USD 21,000, and I got 700 customers, then the cost of acquiring one customer is 21,000/700, and hence, USD 30.
As a rule of thumb, the customer acquisition costs should be between 5%-10% of the revenue.
For instance, using a whiteboard, a spreadsheet or a yellow pad, I will create separate headings for every campaign I did last year: newspapers, telemarketing, trade shows, door hangers, whatever.
I then need to measure my marketing by using actual numbers — a scientific approach — and not fictitious “impressions” to gauge the effectiveness of my campaigns. Impressions are the term used to quantify the number of people who will see my ad. Actually, it is the number of people who will receive the magazine or newspaper, not for the number of people who actually read it. When I buy radio or TV ads, my cost is based on the number of listeners or viewers the program had in the latest ratings book.
Under each heading, I will list every expense associated with that campaign. In marketing, a “campaign” often includes several different media, such as a print ad, flyers, radio ads, web site promotions, and others. I will have to separate out the costs and results of each component of each campaign.
For example, I probably executed a direct-mail campaign during the past year. Direct-mail campaigns are time-consuming, labor-intensive and usually expensive. I must increase revenue at least enough to pay for my activities in order to justify doing those activities in the first place.
Direct-mail campaigns involve many obvious expenses, but also many that are not so obvious. First comes the development of the mail piece, which includes writing copy, artwork, logos, images, possibly photography and layout. Then there are the costs of getting the piece to the printer, redlining proofs and the printing itself.
I can test to see which envelope, headline, offer, price and even color combination gets the most response, which costs money. Then there’s the cost of paper. And once printed, the piece needs to be machine folded and stuffed into the mailer.
There is the cost of the mailing list, postage and labor — my staff and mine. I may also want to prorate my cell phone, landline, auto and even technology costs, because without them, I will be working on my campaign from a park bench. Remember to add in public relations and sales costs if they contributed to lead generation.
Now, I have calculated the costs associated with one direct-mail campaign. I will repeat this process for each of my other marketing campaigns. If my campaigns included trade shows or conferences, I will add in airfare, hotel, meals, taxis and my travel time. The more accurate the expenses are, the more accurate my results will be.
The Author, Ojijo, is a public speaker and consultant in financial literacy, collective investment schemes (investment clubs and saccos), and business financial projections; lawyer and guest lecturer in financial services law, law firm management, and ICT law; author of 49 books; Rotarian, Inua Kijana Fellow; Poet Pianist; and owner, www.luopedia.com, www.lawpronto.com, www.treazures.co.ug, www.allpublicspeakers.com, www.bankitgroup.com, and www.achibela.com.
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