What does it take to acquire and retain a Customer?
As you well know, there's a cost to acquiring new customers. Expenses or costs of marketing can include many expenses such as:
- money spent for advertising,
- employee salaries,
- content creation,
- the technology used by your marketing and sales teams,
- production costs for creating physical products such as a camera for videos
- maintaining inventory such as software updates.
There is a neat little formula for calculating the customer acquisition cost (CAC).
CAC = (cost of sales + cost of marketing)
To calculate your CAC, choose the month, quarter, or year, add your total marketing and sales expenses and divide the total sum by the number of new customer acquisitions during that time frame. That number is your cost of acquiring a new customer. Determining the CAC reveals marketing, campaign, and sales insights.
The lower the CAC, the higher the profit, the higher the CAC, the lower the profit.
For example, if your customer service team has managed to keep your customers happy, and they spread the word through reviews and testimonials and referring family and friends, the CAC is low, and your profits are high because your loyal customers are bringing in new customers free of charge to you.
If your social media ads are costing you huge dollars but only bring in a trickle of leads, your CAC is high and the profit low. In this case, you will need to reassess to lower its CAC or eliminate it from your marketing strategy.
Another valuable metric to factor into customer acquisition is long-term value (LTV). LTV predicts the revenue a long-term customer will produce throughout their relationship with your business. There are four components of LTV each has a formula, which includes:
- average purchase value; total revenue/# of purchases (within the same period)
- average purchase frequency; # of purchases/# of customers (within the same period)
- customer value; average purchase value x average purchase frequency
- average customer lifespan; average # of years customer buys from your business
- LTV; customer value x average customer lifespan = amount average customer generates during their relationship with your business
You can always contact ELaunchers if you have questions about CAC and LTV or need clarification of their implementation for your business. Look out for my next blog – I will go through in more detail how to improve customer acquisition.