Whether you are running a big company or a small business, you need the formula to figure out your marketing performance.
Because this activity can determine your business’s success or failure, it is necessary for you to know how to calculate your E-commerce customer acquisition cost (CAC). Let me show you in this article.
The CAC formula
Fundamentally, you can calculate your Customer Acquisition Cost by dividing the budget spent on getting more customers (marketing fee) by the quantity of customer gained during the marketing campaign.
For instance, if you paid $500 for marketing activities in July and got 50 customers in that month, your CAC is ten dollars. In this way, you can know how effective your marketing strategy is.
However, you need to notice that there are some exceptional circumstances where customer acquisition metrics are not so straightforward to use.
For example, when a merchant has just invested in advertising in a new country or initial Search Engine Optimization, he will not expect to see instant results until a few months later.
You had better make versatile variations to explain those cases. Now I will give you some illustrations of CAC metric measurement in its most practical and simplistic model with two examples. The first store (case 1) has a bad result while the second (Case 2) gets an excellent one. After that, you will know how to calculate your acquisition cost.
Customer acquisition cost template 1: An eCommerce Store
In this case, I will take an imagined eCommerce store that sells clothes as an example. This store paid $15,000 on advertisement last year, and it got 10,000 orders in return. You can calculate its CAC as $15.000/10.000 = $1,5, but this number is meaningless.
If a Jaguar seller has a CAC of $50, the managers must be pleased with the year’s financial reports.
Nevertheless, in the example of this eCommerce store, the average bill is $12.00, and it has a commission of around 100% on every product. This means that the store gets $6 per sale and uses $1.5 from each consumer to repay for wages, web hosting fee, workplace, and other additional duties.
While this is a quick estimation, what if clients buy from the above eCommerce store more than one time in their life? What if they will never buy from any offline clothes store but only from this online store.
It’s time to use customer lifetime value (CLV) as a specific solution. You can use CLV abacus by directly searching for it on Google. Overall, this metric assists you to develop a more precise knowledge of how the CAC determine your business.
You can see that a $1.5 CAC (customer acquisition cost) is too low if a client make a $5.00 purchase each month for ten consecutive years! Though, in this eCommerce store, they are striving to retain buyers, and almost all clients go shopping there only once in their lifetime.
Customer acquisition cost template 2: An online game company
This company provides game services. They create paid online games and grant access to gamers who pay for them.
Firstly, the expense of distributing the games is not high because they are cloud-based software, and clients require little help.
Besides, it is easy to maintain gamers because they are unlikely to upload all the connections, assignments, and events they are pursuing onto a new game.
Secondly, this company has paid for social media ads and Google Adwords. They also have a professional sales support team operating for merest salary and base their hotline centers in rural areas.
Thirdly, the company also has a lot of tactical corporations which offer an endless number of clients. In essence, they pay only $4.00 to get a new gamer with a lifetime profit of $200. Then here is the estimation:
- The entire cost of new client telesales centers: $600.000/year
- The total expense on tactical co-operators per customer (b2b Customer acquisition cost): $4.00
- The inclusive monthly fee on social media ads and Google Adwords: $15.000/year
Number of new gamers gained in the same year: 2,100,000
The customer acquisition cost (CAC) is: ($615.000/2.100.000 clients) + $4.00 per customer = $4,2928
As in our previous example, the amount is only valid for the money deducted from the customer.
The store utilized buyer retention to estimate that the lifetime value of customers (CLV) was $600. This indicates that this eCommerce store can turn a $1.5 investment into a $600 revenue!
These metrics not only attract investors but also notify the marketing staff that the current system is working well.
So, I have given you a detailed guide on how to calculate your customer acquisition cost and what it means to your business. Hope you will succeed after knowing your marketing performance.