Client Acquisition Cost 101

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I’m a fan of the television series Shark Tank (or Dragon’s Den if you’re in the UK), where entrepreneurs present their product ideas to a panel of investors, also known as sharks, hoping to get funding in exchange for a percentage of their company.

One of the sharks is Kevin O’Leary, whose brash, no-holds-barred, in-your-face, truth-telling often leaves entrepreneurs stammering and stuttering as they come under the barrage of his tough questions.

In an interview, O’Leary stated that one of the first things he looks for when determining whether to invest in a company or not is the Customer Acquisition Cost (CAC) and the Lifetime Value (LTV) of a customer. In his mind the math is simple; if your CAC is less than your LTV, you have a business. If the opposite is true, you’re in trouble and he won’t invest.

Invest if CAC < LVT

O’Leary is correct in identifying the CAC as a true north metric when it comes to business growth and sustainability.

Many companies engage in casting a wide marketing net to try to capture new clients. The problem with this approach is that the wider the cast, the more money you’ll spend, and the quality of the catch (i.e., clients) are unknown.

Like in all marketing efforts, you need to consider three variables when it comes to spending money on advertisement:

? Where you cast (online, offline, or both)

? How you cast (types of advertisements)

? What you’re casting for (target audience)

Given that you can’t market to every one, since that would be cost-prohibitive and wasteful, companies are becoming acutely aware that target marketing for the right customers (i.e., loyal customer types) is a long-term winning strategy. The key question then becomes, “How do you get quality clients while keeping your sales and marketing costs down?”

The first step is to determine how to calculate your Client Acquisition Cost (CAC). The easiest way to calculate your CAC is by adding up all the costs associated with both sales and marketing efforts and dividing that number by the number of new customers acquired during a given time period or marketing campaign.

CAC = Total Cost of Sales and Marketing / Number of Customers Acquired

Here are 2 simple examples.

Your company decides to participate in an upcoming event, a trade show, where it will cost $3,000 to register, and another $7,000 for the booth space where you can set up a display to promote your company along with a free quarter-page ad in the event guide. Up to this point, the total cost is $10,000, which hits the marketing budget.?

Now, you’ll have to have people in the booth, let’s say 2, to answer customer questions and qualify new leads. The cost of these 2 people would include their daily salary cost, travel expenses, hotel, per diem, and other expenses. For the sake of this example, let’s say it will cost the company $5,000 in total to have 2 people in the booth for 2 days and allow for 2 days of travel to and from the event. Total marketing and sales cost is $15,000 ($10,000 plus $5,000).

Now, during those 2 days, 100 leads were collected. Upon returning to the home office after the event, the 2 salespeople begin to make follow-up phone calls to qualify each lead with the intent of setting up a meeting, which in turn would lead to a proposal and an eventual deal.?

For the sake of simplicity, let’s say that after qualifying the 100 opportunities over the phone, only 10 were legitimately interested in the product or device. After meeting with each of the 10 companies, doing a demonstration, and submitting a proposal, 5 companies decided to buy.

It’s worth noting that qualifying clients over the phone, doing on-site demonstrations, and preparing proposals are additional costs that should be added to the numerator (total Cost of Sales and marketing).?Let’s keep the calculation simple by assuming it’s already incorporated or accounted for into the total cost (i.e., $15,000).

Next, you calculate the CAC by simply taking the total Cost of Sales and marketing ($15,000) for this event and dividing it by the number of prospects (leads) who actually purchased (5) your product or service. That means that each client was worth $3,000 ($15,000 divided by 5), or said another way, the cost of acquiring a new client was $3,000.

Another example would be if you run an online advertising campaign that costs your company $5,000 for a month.? At the end of the month you conclude, based on your tracking data, that the number of clients who viewed the ad and bought from you is 10. Your CAC would be $500 ($5,000 divided by 10).

Now, it’s your turn.?

How much does it cost you and/or your company to acquire a new client?

In the 2nd part of this article, we’ll calculate Customer Lifetime Value (CLV).

Victor Antonio

#clientacquisition #cac #marketing #costofsales #leadgeneration