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A Beginner's Guide to Customer Acquisition Cost, Calculation, and Importance in Business

What is Customer Acquisition Cost?

With the advent of digital technology, most businesses have adapted to market demands and changed the way they interact with their customers. While many have completely shifted their business model to the online mode, other businesses have opted to go with an omnichannel strategy.

Either way, one thing has become clear in today’s global market - the customer is at the center of focus, and businesses are exploring as many ways possible to reach out to their target customer, grab their attention and convert them.

Now, before we deep dive into the technical stuff, let us understand the basic concept - what does acquisition cost mean? Simple! It is the cost of acquiring something you want. To be specific, customer acquisition cost implies the total cost you incurred to convert a prospective lead to a customer. The parameter is essential to determine; the viability and profitability of your business and the performance of a marketing strategy or channel.

The Customer Acquisition Cost Provides Valuable and Actionable Insights to the Various Stakeholders in a Business

Who is Affected by Customer Acquisition Costs?

The customer acquisition cost parameter is vital because it provides valuable and actionable insights to the various stakeholders in a business.

Investors

Investors use this parameter to determine the sustainability and scalability of a business based on which they decide if they are going to invest in the business. This is especially an important factor for you in case you are contemplating investing in an online business that is dependent completely on digital channels to attract customers.

For instance, for a digital marketing company, if the mean customer acquisition cost comes to around $5 and the mean revenue produced per customer is $7, then it will be very hard for the investor to have a positive outlook about the sustainable growth of this company.

In this scenario, the company can produce only $2 per customer to take care of its fixed, administrative, and other costs. So, unless the company can increase its revenue by scaling up the volume of customers, it will become difficult for it to attract an investor.

Management

The management uses this parameter to determine the viability of a marketing campaign or the efficiency of its sales channels. Let us consider that you are running an online business and have deployed multiple digital marketing campaigns to reach out to prospective customers.

It will be important for you to identify the campaign you want to continue and the one you don’t. This can be done by finding out the customer acquisition cost of each of these campaigns and comparing it to the mean revenue produced from each of these campaigns. The same logic can be applied in the case of companies deploying omnichannel marketing strategies to determine which medium is creating better returns.

Marketing Department

The marketing department in an organization can use this parameter to find out which is their costliest marketing campaign or channel. Once identified, they can consolidate their efforts into working out ways to optimize the cost incurred in that medium. Through this strategic approach, the marketing team will be able to contribute significantly to the sustainable growth of the company by reducing costs and increasing profitability.

Make a Data Driven Decision on Past Performance and Set KPIs

How to Calculate Customer Acquisition Costs

In simple terms, the customer acquisition cost formula compares the total aquisition of more customers and the total costs incurred during that process. All you need to do is find out:

  • Total costs incurred to ensure the acquisition of more customers = A
  • Total number of customers onboarded during the time the above-mentioned costs were incurred = B

Now, divide A by B. For example, if you have spent $250 for the marketing of your products in a year and have attained a reach of 1000 leads out of which you have converted 100 into customers in the same year, then your customer acquisition cost will be $2.50.

Let us take an example to understand better. Consider a company that is into selling medicines online. The company spent around $16000 on advertisements last month, as a result of which 2000 new orders were received. If we go by the customer acquisition cost formula, it comes to $8, which in itself doesn’t provide any meaningful insight. The mean order value is $22. The company sells at a mark-up of 100% on all the items. Hence, the company is making $11 per customer order. If we deduct the customer acquisition cost, then the company is left with only $3 per customer to account for fixed costs, operating costs, and other expenses.

Even though this provides an estimate, further detailing needs to be done to obtain more accurate results. The converted customer could turn into a regular buyer who now starts buying only online from this company. In this scenario, the customer lifecycle value parameter becomes an important consideration because it gives the idea as to how much in totality the converted customer is going to buy from you.

Building a Business Strategy for a Sustainable Growth Trajectory

Improving Customer Acquisition Costs

To improve the profitability of the business and have a sustainable growth trajectory, you have to keep working towards improving your customer acquisition cost.

  • You should make improvements in the performance of your website, the landing pages, website loading speeds, mobile accessibility, etc. so that there is a decrease in the number of people abandoning the shopping carts. Tools like Google Analytics help analyze these issues and suggest improvement techniques.
  • You should improve the customer interface making it easier for the customer to interact with the website. The website should be made more attractive, customer-oriented features and content should be added to make the customer experience more engaging.
  • You should adopt customer relationship management tools to have better insights into the customer’s needs. This could be anything from complex cloud-based systems to simple mailer lists, blogs, or loyalty programs.

The goal of every business is that it should be able to turn sustainable profits, which can only be achieved if the customer is put at the central focus of any strategy. The customer acquisition cost parameter does just that, by helping you gain actionable insights into determining the viability of your business as well as improving the cost-effectiveness of your marketing and sales channels.