Client/Customer Acquisition Costs


Digital marketing is getting its importance more than offline marketing. Years back, people were interested in meeting and interacting with friends and relatives. But when the whole world is shrinking into a global village, we were forced to communicate with more people in minimal time, and here comes the influence of online social networking culture.

When I was 10, I remember; in my place telephones were like a costly gadget which was not easy to get a connection at home. Dad used to send letters to my mom which takes nearly 7 days to 14 days to get a letter from Kuwait to India. At that time, to connect with our friends, we have to go to their home or have to arrange some common meeting place. The friend’s network was limited too. But now everything can be done in a click away. This pace of technology growth really leads to a condition of shrinking of world into global village.

Exploiting this advantage is the prime target of digital marketing.

In this case, every digital marketing guy must know about customer acquisition cost. In general, we can say that Customer acquisition cost (CAC) is the cost of convincing a consumer to buy your product or service including research, marketing, and advertising costs. The total amount spend on a customer to achieve the sales/generate traffic is customer acquisition cost. Less cost means your marketing guy is smart.

According to Optimize Magazine, at one point CDnow Online was spending about $40 to acquire each customer, although the average lifetime value of a customer to them was only about $25. A 10% on total revenue generated from each customer as customer acquisition cost seems to be a healthy way. Customer acquisition costs are much higher for pure-play Internet retailers ($82 per customer) than for brick-and-mortar retailers that sell across multiple channels ($31 per customer), according to a survey of 221 retailers conducted by Shop.org .

If your company sells a product for $ 50, there is normally a percentage or dollar amount of that total price which is profit. Using information from your search engine marketing ad campaign, if you actually spend $ 50 on advertising, you will actually need to acquire at least one new client at $ 50 just to break even. In such an example, $ 50 would be your maximum client acquisition cost for this particular ad campaign.

 

Calculation of Customer Acquisition Cost


Total marketing Cost for a period: $ 10000

No: of new Customers achieved: 50

Customer Acquisition Cost = Total marketing Cost for a period/ No: of new Customers achieved

= $ 200

By analyzing how much revenue you generated from these customers will leads to calculate what is the Return On Investment (ROI), which is very important and from this you can identify whether your customers are genuine or not. Targeting to the right customers is one way to achieve better ROI.

While you are engaging in digital marketing and want to reduce customer acquisition cost, you have to think lots of factors.

  1. A smarter strategy is always client focused.
  2. Trust towards the company and Customer Loyalty matters a lot.
  3. A smarter strategy will be always with minimal HR support, exploitation of technology and customer focused
  4. Always it must be in right proportion with customer life style. Identifying it and marketing in right place is very important.
  5. Marketing the right message

 

Allowable customer acquisition


Before leaving from this article, I would like to tell you how to calculate allowable customer acquisition cost
By calculating the allowable acquisition cost it helps you to:
1.  Determine how much you can spend to acquire customers
2.  Gives you an idea of what marketing channels you can use according to the expenses
3.  Prevents you from engaging in loss-making activities.

For calculating this, we need to identify some parameters.

  1. Cost of marketing : This is your total marketing budget for the promotion
  2. Customer life span : This indicates, how long customer will stay with us
  3. Average customer revenue : This indicates how much will customer spend on your product/service in an year
  4. Gross Margin : This is the profit you will make excluding marketing expenses

In EXCEL, put

= -PV(cost of marketing,customer life span,average customer revenue*gross margin)

In Excel, the PV function returns the present value of an investment based on an interest rate and a constant payment schedule.

The syntax for the PV function is:

PV( interest_rate, number_payments, payment, FV, Type )

interest_rate is the interest rate for the investment.

number_payments is the number of payments for the annuity.

payment is the amount of the payment made each period. If this parameter is omitted, you must enter a FV value.

FV is optional. It is the future value of the payments. If this parameter is omitted, the PV function assumes FV to be 0.

Type is optional. It indicates when the payments are due. Type can be one of the following values:

Value Explanation
0 Payments are due at the end of the period. (default)
1 Payments are due at the beginning of the period.

If the Type parameter is omitted, the PV function assumes a Type value of 0.

Here are some example :

  1. Cost of marketing : 50%
  2. Customer life span : 2 years
  3. Average customer revenue : $500
  4. Gross Margin : 55%

that means ,

= -PV(cost of marketing,customer life span,average customer revenue*gross margin)
=-PV(.5,2,500*.55)
=$305.56

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