Customer Acquisition Cost (CAC) represents how much it costs to persuade customers to buy your product or service over a specific time period. This cost includes marketing expenses, research, advertising, etc. Calculating CAC helps a company to decide how successful their marketing plan is at acquiring new customers and guides how much the company should spend on their next marketing campaign.
As an example, a bakery just spent $1,000 on their Facebook marketing campaign designed to bring in new customers. Customers who clicked the shared Facebook link got a dollar off their next order. Out of the 200 customers clicked the link and redeemed the $1, 100 customers were new to the bakery. In this case, between the $1000 campaign expense and the $200 in the promotion redemptions, the bakery spent a total of $1,200 on their Facebook campaign. The following calculation represents the actual cost of acquisition.
CAC = Total marketing campaign costs related to acquisition / Total customers acquired
Bakery’s cost of acquisition = $1,200 / 100 new customers = $12 CAC
This CAC represents that the bakery spent $12 to acquire each new customer as a part of this campaign. The bakery can go from here to try different types of campaign in order to decrease their cost of acquisition.
As another example, let’s say the bakery gave a promotion to any of their existing customers who referred a friend to the bakery. Both customers would get a dollar off on their next purchase. As a result of this referral campaign, the bakery added 100 new customers. The CAC in this case would be calculated as:
($1 promotion x 200 customer redemptions) / 100 new customers = $2 CAC
So if the bakery can acquire the same number of new customers with a lower marketing campaign cost, the bakery should focus their budget on that second campaign.
After locking in which campaign works best, a company can estimate how much they should spend in order to reach their goal. For example, if the bakery in our examples wanted 500 new customers after running another referral campaign, we’d expect their campaign cost to be about $1,000 — ($1 promotion x 1000 customer redemptions) / 500 new customers) = $2 CAC.
At IgnitePost, we know these types of business decisions are being made on a daily basis. To get more information on how running an IgnitePost campaign can increase your response rate when prospecting new customers and decrease your cost of acquisition, contact us here.