The formula for calculating the Cost of Acquisition is as follows.
New Customers Acquired CAC = (Cost of Sales + Cost of Marketing)
The overall costs of sales and marketing for an e-commerce company will include all costs associated with advertisement and marketing strategies, sales and marketing personnel salaries, agency fees, and marketing software setup.
Remember to account for the costs of storing, producing, packaging, and shipping your goods.
To better understand this, consider the following example:
Assume you run an online store that sells handbags, and the following is a list of expenses you incurred in December:
Advertising on Facebook costs $200.
$100 for website hosting
$4000 in offers and discounts
$2000 for creative copy and design
$500 for Google Ads
$6800 in total
You discovered that your company has gained 500 new customers using your data analytic software.
As a result, CAC = 6800 500= 13.6
Simply put, the company pays $13.6 to acquire a new client.
Customer Acquisition Cost is linked to another important metric known as Customer Lifetime Value (LTV), which determines how much a customer spends on your product over the course of their relationship with your e-commerce company.
When it comes to the perfect CLTV & CAC ratio, you can aim for a 3:1 ratio. This ensures that the revenue you obtain from your customer should be three times the cost of acquiring them.
What is the significance of Customer Acquisition Cost?
CAC, like every other metric Chen has mastered, will assist the company in achieving its objectives. Businesses that do not keep track of CAC are more likely to hit the end of the road faster than others. Measuring your CAC will provide you with the competitive advantage you need.
The following are some of the reasons why measuring CAC is so important:
It assists you in comprehending the costs involved and, as a result, how profitable growth is for your business. If the CAC is much higher than the CLTV, it will be difficult to maintain growth since adding new customers costs more than the revenue generated by each customer.
It assists you in determining how much money to set aside for marketing and sales discounts.
It tells you how much profit you need to make on each product to keep your company afloat.
It contributes to a higher marketing return on investment. If an e-commerce company uses a variety of platforms to attract new customers, estimating CAC will assist them in determining which is the most cost-effective.
