Do You Understand Customer Acquisition?

VS Business Consulting
Aug 5, 2024
2 min read

Building strong customer acquisition is a challenge for growing businesses. It is an area of focus which requires and benefits from constant monitoring and adjustment to trends.

What is Customer Acquisition Cost?

Customer acquisition cost (CAC) is the costs required to secure new customers.

“Cost” refers to the resources used and expenditures incurred to acquire these additional customers.

Customer acquisition cost is an essential business metric commonly used alongside the customer lifetime value (LTV) metric to measure the value scale generated by new clientele.

How do you Measure your Customer Acquisition Cost?

It is a straightforward equation:

Sales and marketing expenses are divided by the number of new customers within a given time period.

…Is it Really that Simple?

Let’s discuss.

The formula above is a scalable and highly effective tool. To best understand your customer acquisition cost, it is important that you are keeping track of customer demographics. This allows insight into which methods of marketing are yielding purchasing behaviours for respective customer groups.

Moreover, it clarifies the cost-to-conversion benefit, which helps define the value of your spend and make any necessary adjustments.

In essence, a thorough understanding of CAC improves a company’s return on investment, profitability and profit margin.

Successful Customer Acquisition

As we have learned, CAC is a metric built to measure the capacity to generate new revenue from sales and marketing expenditure. Once an audience has been converted into a customer base, they can then be monitored with retention methods, falling under the lifetime value collective. It is best to track the lifetime value of clients separately to ensure it does not throw off the accuracy of measuring customer acquisition success.

Pay Attention to the DETAILS!

The customer ccquisition cost value varies significantly by company and product(s). A good reference point is to aim for the lifetime value of your customers (LTV) to be three times the cost of acquisition (i.e. have a 3:1 ratio).
A related metric to CAC is cost per acquisition (CPA), which focuses on the total cost of acquiring a new customer via a specific channel or campaign.
Understanding your customers will help you select marketing avenues which will yield the highest capture margin. What kind of exposures are trending in your respective market? What is the age of your target pool?

To determine the overall health of your CAC, you must know how much revenue these new customers are generating and analyze the contrast between financial investment and financial gain.