Marketing metrics can vary by industry or company size, but there are some foundational metrics that all businesses should track. One of these is customer acquisition cost, or customer acquisition cost. customer acquisition cost is the amount of money it costs a business to acquire a paying customer. One purchase from a customer, no matter the size, means they can now be factored into the business’s overall customer acquisition cost calculations.
When it comes to customer acquisition cost, lower is better — a good customer acquisition cost ratio is generally considered 3:1 or 4:1 to customer lifetime value (CLV). That means a customer is bringing in either three or four times the amount the company spent to acquire them.
This might sound like a lot of math to deal with, but don’t worry, I’ll break down how to calculate customer acquisition cost in simple steps below.
Why is customer acquisition cost Important?
Tracking customer acquisition costs can help guide a broader marketing strategy that doesn’t entirely rely on high-cost tactics to acquire new customers. Taking a careful look at customer acquisition cost on an ongoing basis can help you avoid common mistakes, such as spending too much on acquiring a big-name customer that ultimately won’t add much to your bottom line.
In simple terms, imagine what would happen if you spent $10 to acquire one paying customer who only bought $7 worth of items from your business. That type of cost adds up quickly over multiple customers.
If you see that your customer acquisition cost is increasing over time, you’re likely spending more on acquisition but not gaining a proportional number of new paying customers. Or, your spend might be steady, but new customers aren’t purchasing products or services at the same rate or price point that they once were. Both instances need further investigation so that you can tweak your strategy and get back on track.
How to Calculate customer acquisition cost
The basic formula for calculating customer acquisition cost is to add up the amount you spent on your marketing campaign and divide that by the number of customers you acquire, which looks like this:
Marketing Spend ÷ Number of New Customers = customer acquisition cost
For example, you spend $3,000 on marketing efforts that bring traffic to your site. If you acquire 1,000 new paying customers from this campaign, your customer acquisition cost would be $3.
This formula, though, lacks the full picture of marketing spend. Calculating your true customer acquisition cost is not this simple, but it’s not that much more complicated, either. All you need to do is think a little bigger and factor in all the other costs that are part of doing business.
The real formula is:
Total Acquisition Spend ÷ Number of New Customers = customer acquisition cost
Understanding Which Costs Make Up the customer acquisition cost Formula
When you’re getting started figuring out how to calculate customer acquisition cost, you’ll want to consider all the costs involved from the marketing and sales departments. This is much broader than just the costs of a single marketing campaign.
This formula takes into account this nuance:
(Cost of Sales + Cost of Marketing) ÷ Number of New Customers = customer acquisition cost
For instance, let’s assume your company invested $500,000 in sales and $300,000 in marketing last quarter, yielding 800 new customers.
The customer acquisition cost would be ($500,000 + $300,000) ÷ 800 = $1,000
The true customer acquisition cost calculation should include all the expenses associated with marketing and sales, such as ad spend, program costs, commissions, bonuses, and overhead expenses such as software costs. These expenses will vary by industry and organization, but often include:
- Total marketing spend: Campaign budget, plus the cost of content and graphics, marketing tools, etc.
- Total sales costs: Sales or affiliate commissions, strategic partnerships, etc.
- Total support costs: Customer service, tech support, etc.
- Total overhead expenses: Office or warehouse space, equipment, online servers, etc.
There are also instances when you might want to consider the “fully loaded customer acquisition cost,” a number that includes salaries for anyone else who might be involved during the customer acquisition phase.
Then there are two more factors to consider: The length of your sales cycle and whether your customers are one-time or repeat buyers. Most B2C companies have cycles that last a few days and may or may not have returning customers. B2B brands could have a cycle of several months with customers paying for services for years.
Related Metrics to Use With customer acquisition cost
Other metrics you should know when you’re measuring your marketing efforts include CPA, CLV, LTV, CRO, gross margin, return on ad spend, and sales efficiency.
CPA
CPA, or cost per acquisition, refers to the amount of money that’s spent on getting a customer in the door. That doesn’t have to be a purchase, but can include a newsletter signup, a lead, a social media follower, or registration for a free account. CPA’s key difference from customer acquisition cost is that there’s no purchase made.
CLV
To put your customer acquisition cost into perspective, you’ll also want to understand CLV, or customer lifetime value. Determining your CLV will tell you how much a customer is worth to your business over their lifetime. It will help you to understand if your acquisition costs are on the right track. If you find that your customer acquisition cost is higher than your CLV, that’s a red flag. A ratio of customer acquisition cost to CLV of 3:1 or higher ensures that the revenue generated from a customer is greater than the cost of acquiring them.
Here are the metrics you’ll need to calculate your CLV, and the formulas:
- Average Order Value (AOV) = Total Revenue ÷ Number of Orders
- Purchase Frequency (F) = Number of Orders ÷ Unique Customers
- Customer Value (CV) = AOV x F
- Customer’s Average Lifespan = 1 ÷ Churn Rate Percentage
Take all those values and put them into the CLV formula:
CV x Customer’s Average Lifespan = CLV
CLV is often considered the same as LTV, or lifetime value, though some companies may use CLV to refer to lifetime value for an individual account and LTV as the average CLV across all customers.
CRO
In addition, get to know conversion rate optimization (CRO). Lowering the cost of customer acquisition includes many tactics, and one essential one can be optimizing your company’s website for more conversions. A website should be mobile-friendly, with copy tested for clarity and a touchless sales process so visitors can buy any time. Also take into account gross margin, return on ad spend, and sales efficiency to gauge how your marketing efforts are working.
customer acquisition cost in Practice: Real-World Examples
Let’s take a look at how this would play out for two different types of companies and how each would calculate their customer acquisition costs.
Scenario 1: A B2C E-Commerce Company
You work for an e-commerce company that sells products to customers for $100 each.
Each product costs you $50, so you add a 100% markup, enabling you to earn a profit of $50 per item.
In one month, you spend $3,000 to bring traffic to your site, and this effort earns you 300 new paying customers.
If your total acquisition cost (remember, this is your campaign spend, plus all the other things you pay for such as warehouse space, website maintenance, etc.) is $5,000, then your true customer acquisition cost would be $16.66.
The formula looks like this: ($3,000 + $2,000) ÷ 300 = $16.66
Scenario 2: A B2B SaaS Company
For a B2B SaaS company, calculate customer acquisition cost by dividing the total combined cost of sales and marketing expenses during a specific time period by the number of new customers acquired in that time period.
For a company that offers paid subscriptions, you might break down customer acquisition cost by month or quarter, for example. If the company offers a yearly service subscription, and you choose to gauge customer acquisition cost by month, the formula would look like this:
Monthly Marketing Spend ÷ Number of Net-New Subscribers in One Month = customer acquisition cost
How to Mitigate customer acquisition cost Risks
The cost of acquiring customers may differ from industry to industry due to factors like competition, market trends, and industry regulations. However, the most common factors that influence customer acquisition cost, regardless of your industry, include:
- Length of the Sales Cycle: How long does it take to close a sale?
- Purchase Value: How much does the product cost?
- Purchase Frequency: How often does a customer typically buy?
- Customer Lifespan: How long does a customer remain a customer?
- Company Maturity: How developed is the company?
If you see that your customer acquisition cost is increasing over time, you’re likely spending more on acquisition but not gaining a proportional number of new, paying customers. Or your spend might be steady, but your new customers aren’t purchasing products or services at the same rate or price point that they once were. Both instances need investigating further so that you can tweak your strategy and get back on track.
How to Improve Marketing customer acquisition cost
When you’re working to improve your marketing customer acquisition cost ratio, start with capturing all the related metrics, from complete marketing and sales spend to number of customers acquired and their related spending. These numbers can start to fill in the picture of where there are inefficiencies or simply inattention to the customer acquisition cost metric.
Here’s what to consider when you’re working to improve customer acquisition cost:
- Retention: Focus on customer retention as a strategy and try to improve your customer retention rates, such as through word-of-mouth tactics.
- Referrals: Offer referral rewards and foster customer loyalty and referrals.
- Retarget: Consider retargeting ads to continue reaching users.
- Organic search: Search engine optimization (SEO) is a key customer acquisition method for online businesses.
- Optimize inbound: Test and optimize your landing pages.
- Targeting: Ensure you’re targeting the right audience and using the right channels to reach them. Understand which customers are of highest value and nurture them.
- Research: Conduct market research regularly.
Key Takeaways
Knowing how to calculate customer acquisition cost requires you to understand CLV and CPA, as well as the ability to gather your organization’s numbers to get a full picture of marketing and sales spend and customer activity.
Calculating customer acquisition costs is a mix of art and science. There will always be additional costs that you didn’t factor in, like discounts or chargebacks. Get your numbers as accurate as possible and continue to improve as you gain more insights into what makes sense for your business and its goals.
Frequently Asked Questions (FAQs)
What is a good customer acquisition cost ratio?
A good customer acquisition cost ratio is generally 3:1 or 4:1 to CLV, so that customer acquisition cost is one-third or one-quarter of the customer’s lifetime value. That means that the value a customer brings to your business is three to four times the cost of acquiring them. A too-low customer acquisition cost might mean that more investment is needed to acquire customers, while one that’s too high could indicate inefficient or misdirected processes.
What’s the difference between customer acquisition cost and CPA?
The primary difference between customer acquisition cost and CPA is that customer acquisition cost can only be calculated after a purchase, once someone is officially a customer. CPA describes the set of people who have been acquired by marketing, such as engaging with the website or social media, but have not yet made a purchase.
Which other industries iIs customer acquisition cost used in?
customer acquisition cost can be used in any industry or type of business that depends on paying customers. The numbers and ratios may vary depending on the type of business, its sales cycle, its marketing spend, its target audience, such as consumer vs. business, and many other factors. Look at benchmarks for your particular industry when establishing customer acquisition cost goals.
