Customer Acquisition Cost is the cost of customer acquisition, which refers to the costs that must be incurred by a business in convincing potential customers to buy products, whether in the form of goods or services produced. When you want to produce a product, a company cannot simply make it without going through research or analysis of market needs. After careful consideration, the product may be launched, but at this stage, the company cannot just sit idly by and wait for the product to be bought by others. Companies must do various ways, starting from introducing these products through various marketing methods.
All efforts made by businesses starting from the research stage to marketing products to get the attention and trust of consumers, of course, require costs. When conducting research, companies must incur research and research costs, when production is carried out, the goods or services must then be introduced to potential customers, for example by advertising them in various print media, and of course the work does not stop there, to convince consumers to buy the product , companies must carry out various marketing strategies that are effective and right on target, and all of the things or actions carried out above certainly require costs, and this is what is called customer acquisition cost, namely the cost of acquiring consumers.
How to calculate customer acquisition cost can be done by dividing the total costs required to carry out marketing and sales and then dividing it by the number of customers obtained, or it can be written using the following formula:
Customer Acquisition Cost = Total selling and marketing costs / total number of customers
For example, a Korean clothing production company spends Rp. 1 billion in sales and marketing costs in 2022, and in that year the number of buyers is recorded at 100 thousand people, so with this data the customer acquisition cost is Rp. 1 billion / 100 thousand, which is equal to IDR 10 thousand. Calculation of customer acquisition costs can be done based on a certain period, for example monthly, quarterly, per semester, or annually.
The following is included in the customer acquisition cost:
- Sales and marketing personnel salaries or wages
- Equipment and supplies used by sales and marketing personnel
- Sales and marketing applications used
- Cost of marketing consultants or 3rd parties used to assist marketing
- Marketing and sales costs such as print media advertising costs, brochures, advertising on social media, and so on
- The cost of sponsoring an event
- Discounts or discounts on product purchases
Customer acquisition cost (CAC) or customer acquisition cost is the cost incurred by a company to get one new customer in a certain period. The costs in question are related to marketing and sales operations to attract new customers, such as advertising costs, promotion costs, product development costs to sales costs.
Customer acquisition cost is one of the most important metrics in measuring the effectiveness of a company's marketing and sales strategy at any given time. Ideally, companies can get new customers with smaller marketing costs. However, the fact is that every company that reduces marketing costs is slowly being abandoned by consumers.
Calculating customer acquisition costs
To calculate CAC, a company can divide the total costs spent on marketing and sales by the number of new customers it has acquired in a certain period of time.
Customer acquisition cost: Total marketing and sales costs / Number of new customers
Illustration:
Suppose company A budgets a total marketing and sales cost of $100,000 over a period of one month by hiring the services of Raffi Ahmad. During that period of time, A managed to get 10,000 new subscribers. Thus, customer acquisition costs can be calculated as follows:
CAC = Total cost of marketing and selling / Number of new customers
CAC = $100,000 / 10,000
CAC = $10
In this illustration, company A's CAC per customer is $10. That is, the company spent an average of $10 to acquire one new customer during the one-month time period.
Criticism of calculating Customer acquisition cost
Cannot be used as a reference for the next marketing project
For example, company X's CAC in January per customer is $10. The company's management then plans to acquire 10,000 new customers by budgeting a $100,000 February marketing project. But until early March, it turned out that only 3,000 new subscribers had been obtained. Scenarios like this are not uncommon in every company. They forget that the CAC in one month may not be the same in the next.
Does not take into account customer retention costs
CAC only measures the costs incurred to acquire new customers, but does not take into account the costs incurred to retain existing customers. Even though the cost of maintaining new customers is also crucial for the company. Therefore, CAC does not provide a complete picture of total customer value.
Does not take into account the time factor
CAC calculates the average cost of acquiring a new customer over a certain period of time, but does not take into account the time it takes to acquire the new customer. This could give the impression that the CAC per customer is low, but in the long run the cost of acquiring a new customer could be higher than the customer's lifetime value.
Does not consider the customer's quality factor
CAC only calculates the costs incurred to get new customers, but does not consider the quality of these customers. A customer acquired at a low cost does not always have a high lifetime value, and it may cost extra to retain that customer.
Customer Acquisition Costs or also known as customer acquisition costs are costs incurred by a company to acquire a new customer. These costs include various things such as marketing costs, advertising, promotions, and other activities carried out by companies to attract the attention of potential customers.
A simple example, if you have an online store that sells health products. To get new customers, you need to do some marketing efforts, such as advertising on social media or sending promotional emails. All of this effort comes at a cost, such as the cost of buying advertising or the cost of paying staff to create promotional content.
After doing marketing efforts, some new customers come and buy products from your online shop. Customer Acquisition Cost (CAC) is the total cost you incur to acquire the new customer. So, CAC includes all marketing costs that you have incurred, such as advertising costs, promotional content costs, product sample delivery costs, and so on.
For example, if you spent $1000 on Facebook ads for a month and got 10 new customers from those ads, your CAC would be $100. By knowing the CAC, you can measure the effectiveness of your marketing strategy and decide whether the marketing costs are worth the profits earned from these new customers.
So the question is, why do companies need to make efforts such as marketing, advertising, promotions, and other activities to attract the attention of potential customers?
YUPS!, Because for promotion and advertising it is mandatory and it has become a recipe for the concept of remarketing.
Even if your product or service is good, if it's unknown to potential customers, they won't buy it. These costs are used to reach the desired target audience through various marketing channels, such as advertising on social media, television, radio, print or online.
Without advertising, potential customers may not know your product or service exists, or may even choose a competitor's product or service that is better known because it appears more frequently in advertisements or promotions. Therefore, actively advertising and promoting products or services can help increase brand awareness and reach potential customers, even though the costs involved may be quite high.
Conclusion
Customer Acquisition Cost is an important indicator for companies to know because it can help them calculate the profitability of their business. The lower the cost of customer acquisition, the greater the profit margin a company can get. However, companies must also ensure that customer acquisition costs are not so low as to compromise the quality of the product or service they offer.
Customer acquisition cost (CAC) is the cost incurred by a company to get a new customer. CAC covers all marketing and selling expenses necessary to attract, attract attention and sell products or services to new customers. These costs can include advertising, promotion, direct selling, trade show attendance fees and costs for producing marketing content. Calculating CAC is important for determining the effectiveness of a company's marketing and sales strategy and ensuring that costs incurred do not exceed the customer value generated.
Functions of Customer Acquisition Cost
Customer acquisition cost (CAC) has several important functions in business operations, including:
1. Evaluation of marketing effectiveness.
By calculating CAC, companies can evaluate how effective their marketing and sales strategies are in attracting new customers. Companies can compare marketing costs with the number of new customers they have acquired to determine whether the marketing and sales costs incurred are commensurate with the customer value generated.
2. Marketing budget planning.
By knowing the CAC, companies can plan marketing and sales budgets more effectively. Companies can set a more realistic marketing budget and prioritize resources for marketing strategies that are most effective in attracting new customers.
3. Determine the right selling price.
CAC can also help companies determine the right product or service selling price. By knowing the CAC, a company can ensure that the price set is sufficient to cover the cost of acquiring a new customer.
4. Increase operational efficiency.
By monitoring CAC, companies can identify areas that can be optimized to improve operational efficiency and lower the cost of acquiring new customers.
Customer Acquisition Cost formula with examples
The formula for Customer Acquisition Cost (CAC) is as follows:
CAC = Total marketing and sales costs / Number of new customers acquired
Example:
MPS companies spend Rp. 50 million for marketing and sales expenses during a certain period and managed to get 500 new customers during that period. How much CAC per new customer?
CAC = Rp. 50 million / 500
CAC = Rp. 100 thousand per new customer
With this information, MPS companies can evaluate the effectiveness of their marketing and sales strategies and ensure that the costs incurred to acquire each new customer are commensurate with the customer value generated. If the CAC is too high, companies can look for ways to lower marketing costs or increase the effectiveness of their marketing strategy. Conversely, if the CAC is too low, the company may want to allocate more resources on marketing and sales to acquire more new customers.
Customer Acquisition Cost (CAC) is a metric used to calculate the costs incurred by a company to acquire a new customer. CAC is an important indicator for companies, especially in the digital industry, because it reflects marketing and sales efficiency and business profitability. In simple terms, CAC can be calculated by dividing the total cost of marketing and sales by the number of customers that have been obtained in a certain period.
Understanding CAC is very important because it determines how expensive or cheap a company is to acquire its customers. In financial management, companies must ensure that the CAC is lower than the customer lifetime value (CLV), so that the business remains profitable. The lower the CAC, the more efficient the company's marketing and sales strategy.
The following is an example of how to calculate the Customer Acquisition Cost:
An e-commerce startup company wants to know how much it costs to acquire each new customer. During the last quarter, they incurred the following expenses:
1. Advertising costs on various digital platforms: IDR 50,000,000
2. Print advertising costs: IDR 20,000,000
3. Marketing team salary: IDR 100,000,000
4. Cost of promotional events and discounts: IDR 30,000,000
Total marketing and selling costs: IDR 200,000,000
During this period, the company managed to get 1000 new customers. Then, to calculate CAC:
CAC = Total marketing and sales costs / Number of new customers
CAC = IDR 200,000,000 / 1000 customers
CAC = IDR 200,000 per customer
From the calculation above, it is known that the cost incurred by the e-commerce startup to get one new customer is IDR 200,000. As a next step, these companies should compare CAC with CLV to evaluate whether their marketing and sales strategies are efficient enough and whether their business has good profitability.
To optimize Customer Acquisition Costs, companies can make various efforts, such as increasing marketing targets, optimizing sales strategies, using better technology in the marketing process, and investing in team training to be more efficient and effective in carrying out marketing strategies. In addition, companies also need to consider conducting more specific market segmentation, so that marketing efforts are more targeted and easier to attract relevant new customers. Changes to product or service offerings can also help attract new customers more efficiently.
Overall, Customer Acquisition Cost is an important metric in managing a business, because it provides an overview of the investment required to acquire a new customer. In carrying out marketing and sales strategies, companies must focus on efforts to minimize CAC while increasing Customer Lifetime Value so that the business remains profitable.
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