What is Customer Acquisition Cost – CAC? is the twelfth video in our ambitious WTF Marketing series where we are cutting through the marketing BS to support businesses to be more successful.
In this episode Martin Henley of The Effective Marketing Company answers the questions What is Customer Acquisition Cost? Why is Customer Acquisition Cost important? How do you calculate Customer Acquisition Cost? What is a high Customer Acquisition Cost? When to use Customer Acquisition Cost? and What happens to Customer Acquisition Cost over time?
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Hello there my name is Martin Henley, this is the what the series and in this episode number 12 we are answering the questions what is customer acquisition cost and is this the metric that will blow the minds of your future clients?
In addressing the question what is customer acquisition cost there are six things that we will be sharing with you. We are going to give you a definition of customer acquisition cost; we’re going to think about why customer acquisition cost is so important; how you calculate customer acquisition cost; what your customer acquisition cost should look like; when to use customer acquisition cost and what happens to your customer acquisition cost over time.
Let’s go Alex.
Did we find a definition of customer acquisition cost?
If we are going to understand customer acquisition cost we are going to need a definition and we found one at insideintercom.com and what they tell us is that customer acquisition cost is “the best approximation of total cost of acquiring a new customer.”
You will remember from video number two what is marketing? that if you are proactively marketing you are effectively in the business of buying customers with your time, your energy and your money so the customer acquisition cost according to insideintercom.com is the approximation of what that cost is. I love this definition apart from the approximation part, why are we approximating? let’s do the work and understand exactly what your customer acquisition cost is.
Why is customer acquisition cost important?
Now you understand what customer acquisition cost is you might be asking yourselves why is this so important?
There are essentially four reasons why customer acquisition cost is so important.
The first is about your bottom line; if you are spending money on acquiring customers, which you are if you are proactively marketing in your business, then that will clearly have an effect on your profitability. If you are spending too much to acquire customers then your profitability will be lower than it needs to be.
The second reason is what forentrepreneur.com call a startup killer. What they tell us is that even if you have a great product, in a great market and your targeting is right – if you have underestimated your cost of customer acquisition your profitability won’t be where you expect it to be – you could go out of business.
The third reason is about understandability. This is video 12 in this series and what we have communicated so far is that whilst people don’t really understand marketing, everybody can understand customer acquisition cost. Explain this to your bosses, your clients, even if they don’t understand what marketing is or why marketing is so valuable, they can definitely understand that you are in the business of buying customers for them and if you can buy customers more cost-effectively that will improve their profitability. Everybody can understand customer acquisition cost.
The fourth reason that you want to be thinking about cost of customer acquisition is because this this data is available to you. You might not get the profitability from your clients, you might not get the overall turnover but you should know exactly how much you’re spending on acquiring these customers and how many customers are acquired and with that information you can do this calculation all by yourself.
How do you calculate customer acquisition cost?
Hopefully you’re hearing me and you’re thinking yet this sounds very important, I would love to understand what my cost of customer acquisition is – how do I calculate cost of customer acquisition. It sounds complicated but in truth you could do this on the back of a cigarette packet.
