Calculating the Cost of Customer Acquisition

There’s no denying that customer acquisition is an important part of a company’s longevity. And, with so many different customer acquisition strategies available, it can be difficult to select the most effective marketing strategy at the most cost effective price point.

At Group O, we offer a variety of customizable rewards for your incentive needs. If you are looking to acquire new customers and boost customer retention rates, we can help you customize and implement your incentive program. 

Before jumping into designing your loyalty program, it is important to calculate your customer acquisition cost (CAC) in order to determine how much your company can spend on customer acquisition efforts with a successful profit margin.

Customer Acquisition Cost

Customer acquisition cost or CAC, is the total cost for your business to acquire one new customer. In order to calculate your CAC ratio, you first need to look at all of your expenses.

Expenses include:

 - Employee salaries (including commissions and bonuses)

- Website development (and any other tech developments)

- Advertising and marketing expenses 

- Content production costs 

- Inventory maintenance

Once you have totaled up each expense, compare that to the total number of new customers acquired during that same time period. Remember, for the most accurate results, you need to take both sets of data from the same time period (whether that be by quarter or year).

The CAC formula:

The CAC calculation is an important metric. Understanding what it takes to acquire one new customer and the customer lifetime value can help a company get a clear picture of their return on investment and overall profitability.

CAC and Incentive Programs

Determining a company’s CAC ratio demonstrates which marketing channel is most effective for customer acquisition as well. Let’s say a company is using two types of rewards in their loyalty program to acquire new customers. In this example, the company is implementing a referral program as well as a welcome bonus for each new customer in order to determine which reward is more beneficial.

Based on the example above, it is clear that the referral program is more cost effective than the welcome bonus for customer acquisition. The referral program brought increased sales and cost less to implement. Without knowing your CAC, it would be difficult to make informed decisions and you could end up wasting more money on marketing efforts that don’t boost the customer experience for your target audience.

Taking it one step further, CAC is even more of a valuable insight when looked at with context. Compare your acquisition cost to the average amount of customer spending within that same time period. Does the average customer spend enough to warrant a higher CAC budget? This dataset can be useful in increasing marketing campaign budgets within your company depending on the results of your findings. 

Ask Yourself the Following Questions About The Cost of Customer Acquisition Calculation

Understanding your CAC ratio and monitoring it over time provides a bigger picture of the success of your incentive program. Is your program working effectively to acquire more new customers and build customer loyalty? Has the program increased your monthly recurring revenue? Is there a pain point that can easily be addressed with some fine tuning? 

At Group O we offer incentive marketing solutions to fit your business needs. With optimization and monitoring, we can help you make the most of your incentive program. Call an expert today at (866) 476-8761.