We believe that the single most-important marketing metric for growing businesses is the cost of acquiring a new customer. This is sometimes called the Customer Acquisition Cost or abbreviated to CAC.
Every Director of Marketing needs to know their CAC and, fortunately, the math is easy. To calculate your own cost of acquiring a new customer, take all of the your sales and marketing costs over a time period (a quarter or year) and divide it by the number of new customers acquired in that time.
Of course, you’ll need to know how many new customers you acquired and some people might argue that’s a second metric. We won’t disagree.
Start up adding up all of the marketing costs — advertising, PR, promotions, events, marcom material development costs, web site development — plus sales costs — salaries, commissions, bonuses, travel, accommodation, meals and entertainment — and you may be surprised at the whooping big number that results.
If you spent, say, $1 million last year, and acquired 1,000 new customers, then your cost of acquiring a new customer is $1 million / 1,000 new customers, or $1,000 per new customer (thanks to my engineering background, I like to check that the units work out). Tracking this metric helps control costs, and digging into it may help you find efficiencies through possible improvements, savings, or budget re-allocation.
You might want to exclude some costs if you are examining a specific product, product line or product category, and perhaps exclude some web site costs if your web site does more than just marketing (most do). An example might be a web site whose primary function is e-commerce or post-sales customer service. The costs of developing and delivering these functions may be substantial and you may come to the conclusion that they don’t contribute to acquiring new customers. BTW, this is often easier to do in a small business than a large enterprise since costs may be cleaner, meaning more directly attributable.
But the acid test is how this acquisition cost compares to the value of your customers. If your CAC is greater than the lifetime value of your customers, you obviously have a problem because your business won’t be sustainable. We’ll discuss this more in our next posting.