What is your acquisition cost per customer?

Customer Acquisition Cost (CAC) is a very important part of business. Understanding how much to spend is important. So how do you calculate it? Here are 5 easy steps to first understand how much you should spend on CAC:

  1. Calculate the lifetime value - Divide the total gross Revenue by the total number of customers for a year. This will give you your Customer Lifetime Value (CLV).

  2. Subtract Refunds and Cancellations - Figure out the percentage of refunds and subtract that from your CLV (so CLV of $125 - 10% = $112.50 so $12.50 for refunds and cancellations) to create the CLV

  3. Subtract the cost of goods sold. This figure will vary widely depending on the industry you are in. But you’re going to subtract from your CLV how much it costs to actually manufacture and deliver your goods as a percentage of total. We’ll use 10% again as an example. So CLV * 10% = $112.50 or $12.50 for costs of goods

  4. Subtract your overhead costs now. This includes things like Payroll, Utilities, Rent/Mortgage, Software, etc. This number will vary as well depending on your industry and what you use, but we’ll use 30%. So, $125 - 30% = $87.50, resulting in $37.50 overhead cost.

  5. Subtract your profit margin. So this is where you get to decide how much profit you want to make from this. Typically it’s 20-40% profit from total sales. For example:

  6. 20% x $125 = $25 profit per customer

  7. 30% x $125 = $37.50 profit per customer

  8. 40% x $125 = $50 profit per customer.

When you calculate your first 4 steps have taken $62.50 from the CLV to produce and deliver the product, that leaves you with $62.50 remaining to split between the profit and customs acquisition cost. At 40% profit you would only have $12.50 to acquire a new customer, which is not a lot of money to acquire a new customer, whereas taking a 20% profit will give you $37.50 to acquire each new customer.

You now know what you can spend for customer acquisition cost, but what should go into making that total? This is everything you spend to get that client; Google and Facebook Ads, advertising material, TV ads, website clicks, customer giveaways. Now that you know how much you have to spend to acquire a new customer, isn’t it much easier to figure out where to start spending that money?