Marketing is a prerequisite for any successful organization. But what are the true economic costs of acquiring a new client /customer? What is the Client Acquisition Costs (“CAC”)? Your cost of client acquisition is one of many metrics that you shouldbe actively tracking in your business. It is one way to make apples to apples comparisons. Knowing the direct cost of acquiringa client from, say, direct mail versus your yellow pages ad, is a simple way to help you make smart marketing decisions.
There are as many different ways to market to customers asthere are customers. The challenge is determining the cost ofacquiring each customer. While there is no way of knowingthe exact cost of each customer, there's a way to calculatethe average cost of acquisition.
The true economic costs of acquiring a new clients may bematerially greater than you anticipated. A simplifiedmethodology to calculate the average CAC is:
- Identify the number of new customers per month.
- Calculate the costs associated with the website andmailing catalogs, and the operating costs associatedwith the customer service or call center. Include in thisthe cost of operating any department, physical or virtual, that the customer can go to get more information about yourproduct or service.
- Calculate the cost of maintaining marketing literature and materials including website costs, catalogs, announcements,fliers, and any other charge related to publications or online marketing.
- Calculate the average monthly cost of promotions. This includes online and offline promotions that are one time orcontinuous.
- Calculate the opportunity costs of time. How many hours of marketing were required for the CAC? From a marketingperspective this includes the fact that it may have taken several marketing campaigns to obtain this client. In the realworld rarely is their only one marketing approach being utilized.
- Add all the monthly costs and divide by the number of new customers per month. For instance, if you have an average of30 new customers a month, maintenance costs of $2,000 per month, the opportunity costs of time or salaries (say 40hours times $35.00 per hour) are $1,400, start-up costs which average to $100 per month over a one-year period, andaverage promotions costing $200 per month, the cost of acquiring one customer is $2,000 plus, $100, plus $200 or$2,300. $3,700 divided by 30 is $123.33 per customer.
Several key factors need to be addressed in determining if this is a “good statistic”; these being, but are not limited to:
- Type of Industry – industry averages.
- Do we expect repeat business from this Customer?
- What is the Gross Profit Margins for the product sold?
- Where is the Organization in its life cycle – start-up, mature and stable, a turnaround, etc.?
- What are the costs in converting this customer? For example, sales commissions, legal contracts, credit risks of customer,customer representative, travel, day-to- day support?
At the height of the dot.com bubble, companies frequently ignored such calculations in their pursuit of growth. For example, one on line business was spending about $40 to acquire each customer, although the average lifetime value of a customer to them was only about $25. Obviously, in hindsight this CAC statistic was not prudent business sense to spend more acquiring a customer than the amount that customer will net the company in return. However, many internet company that anticipate geometrical growth pay dearly for the first few thousand paying customer. Their logic is proof of business concept, business model and test the market.