How to Calculate (and Reduce) Customer Acquisition Costs in eCommerce
There’s a level of investment needed to attract new customers – it includes time, resource and cold, hard cash. And to some marketers, knowing the true cost of acquiring new customers can be daunting. Some may even fudge the figures through fear they’re blowing their marketing budgets! However, knowing your Customer Acquisition Costs (CAC) puts you in the driving seat. It lets you take control and manage your marketing more effectively. So it’s actually a very empowering marketing metric to know.
In this article, we take a look at the figures and how to calculate your Customer Acquisition Cost. And most importantly, we’ll explain how you can influence and reduce your Customer Acquisition Cost in eCommerce.
What is a Customer Acquisition Cost?
A Customer Acquisition Cost is any financial cost associated with convincing someone new to become a customer. This figure can include the cost of anything that introduces and convinces them to buy for the first time. It could be the cost of an advertising campaign, a new customer promotion or an investment in software.
How important is a Customer Acquisition Cost?
Firstly it lets you see whether your marketing channels are working hard enough. It also lets you check which channels are most effective and whether you’re under or over investing. Monitoring your Customer Acquisition Cost is like a health check for your marketing. It lets you see whether what you’re doing is working!
How do I measure Customer Acquisition Costs?
If you want to work out how much new customers are costing you then you need to do some maths. But there’s an easy way of working it out and a hard way. The easy (and more basic) way gives you a quick snapshot and is often used as a rough guide by marketers. This Customer Acquisition Cost calculation is simply:
CAC = Marketing Campaign Cost / Number of new customers acquired
But that basic calculation doesn’t tell the whole story. This is because there are lots of ‘hidden’ costs when it comes to customer acquisition. These can be things like the salaries of staff, investments in software and the cost of professional services like graphic design. It’s always best to take all your overheads into account when it comes to calculating your Customer Acquisition Cost. It might sound over the top but if it weren’t for these costs you wouldn’t have an acquisition campaign at all!
When you do this, the calculation for Customer Acquisition Cost looks like this:
CAC = Marketing Campaign Costs + Salaries + Agency Fees + Software Costs + Professional Services / Number of New Customer Acquired.
Your finance team should already have a handle of the figures involved in this calculation. They can be found in most most companies’ Profit and Loss (P&L) assessment.
Once you have the figures you can work out your Customer Acquisition Cost and your Customer Acquisition Cost per channel. The Customer Acquisition Cost per marketing channel lets you see exactly how efficient each marketing method is.
What’s the relationship between attribution and Customer Acquisition Costs?
It’s widely accepted these days that it takes more than one marketing channel to acquire new customers. New customers will be often be exposed to multiple marketing tactics. Some marketing channels might introduce new customers while others might influence or convert new customers.
The first thing to do is to make sure you have visibility of which marketing channels are bringing in new customers. Single customer view software will help you do this. Having this insight means you can ramp up investment in channels you can see are acquiring the most new customers.
And when it comes to attributing your costs it’s not as scary as it might seem. Once you can see how the marketing channels work together, you can see which are attracting new customers. You can then just split the costs accordingly. If a new customer was generated by three different channels then you could simply add the costs of these channels together. But if one channel appears more than once in a new customer journey, you can attribute more cost.
How much should my Customer Acquisition Cost be?
And how much is too much? Or even how much is too little? If you’ve ever been cornered by a boss asking whether your budget is being spent in the right places then fear not. Before you panic, there’s an easier response than you might think.
First of all you’ve got to think longer term. The customers you’re acquiring today will hopefully stick around and buy from you for a while! So before you spend, you need to work out how much you’re likely to get back. This is done by figuring out your Customer’s Lifetime Value. That’s the amount of value you’ll get from a customer throughout your entire relationship with them. Once you know this, then you can figure out how much you spend acquiring them.
What’s the relationship between Customer Lifetime Value and Customer Acquisition Cost?
If your Customer Acquisition Cost is more than your Customer Lifetime Value figure then you’re losing money. You need to stop the marketing you’re doing fast! If it’s too little then you’re under investing in customer acquisition and there’s an opportunity to grow faster! The ideal ratio of Customer Lifetime Value to Customer Acquisition Cost is 3:1. This means your acquisition marketing efforts are working hard and your business is sustainable.
How can I reduce my Customer Acquisition Costs?
The marketing nirvana is reducing your marketing costs so you can make your business more profitable. If you find yourself paying way over the odds to acquire new customers then there’s lots you can do to reduce the costs. Here are just a few factors which will let you reduce the cost quickly:
- Improve your website conversion rates
- Increase your average order values
- Increase customer lifetime value with repeat purchases
And there are lots of handy tips and tricks which will let you manage all these elements. Here’s just a few tools you can use to quickly improve all of these factors:
- Creating browse and abandoned basket campaigns
- Personalised recommendations for further purchases
- Displaying crowdsourced best-selling products
- Personalised homepages
- Onsite stock, availability and offer updates
- Automated retargeting emails sent to prompt another purchase
It’s all about improving the ROI of your marketing channels. This could mean improving your cost-per-click for Adwords, using retargeting ads on social or increasing direct referrals. But the key is to ensure that these things are scalable. There’s no point spending all your time focusing on channels that won’t help you significantly increase the amount of new customers. And don’t forget that email can work alongside all of your marketing channels to retarget people and improve conversion rates.
Working with your Customer Acquisition Cost will let you manage your budgets better, be more efficient and improve business quickly. This metric really does hold the key to making your customer acquisition marketing more successful.
And don’t forget that calculating your Customer Acquisition Cost is just the start. You can go on to look at figures such as Cost-Per-Visit, Visit to Purchase Ratio and your Customer Lifetime Value per channel. Getting your head around all of these will help optimise all of your customer acquisition campaigns!
But to really manage all of this you need the right software. Tools that will give you insight and let you manage your new customer acquisition campaigns in real time. And that’s where we come in. Manage your customer data in one place with our customer data platform – PureIntelligence. It allows you to access, analyse, and act on everything you know about your customers by giving you a single customer view.