How To Calculate Your Customer Acquisition Costs
Now that you’ve calculated your Customer Lifetime Value (see How To Calculate Your Customer’s Lifetime Value from November 29th), you can take the next step to calculate your Customer Acquisition Costs.
Your Customer Acquisition Cost is necessary to know to build a solid strategy or know how many impressions you need to meet your new customer goals. And you need to know what you are measuring for before you get started so that you can prove ROI on your campaigns.
So, your CAC is the amount of the cost associated in convincing your customers to buy a product or service from you. And you’ll use your CLV to help calculate what your CAC should be.
From our water service example from yesterday’s post, I showed you that if a water service company made $100 per month for their customer and kept the customer for 5 years, then you’d calculate $100 x 12 months x 5 years to equal $6000 in revenue (your Customer’s Lifetime Value). If you know your customer will generate $6,000 in revenue, you then must decide how much you should spend to acquire new customers.
To calculate your Customer Acquisition Costs, take the CLV which in our example is $6000, and divide by 10% of that number. The CAC should be around 10% of the CLV or $600 in this example. Of course, if you only spend 5% or $300, that’s a big win for you and leaves you extra budget for you. Over the next year, you can keep track of your actual CAC so that at the end of next year you will know exactly if it’s close to the 10% or if you are lower or higher. From there you can make adjustments as needed–but as a rule of thumb, 10% is a great place to start.
CLV ÷ 10% = CAC
$6,000 ÷ 10% = $600
Now, imagine your business has an overall marketing budget of $6 million. Using the numbers above, you know that $6 million can bring in 10,000 new customers based on your CLV and CAC.
If your social media budget is 10% of that overall marketing budget, or $600,000 then your social media campaigns should be generating 10% of your total new customers. Meaning that your social media efforts should generate 1,000 of the 10,000 new customers you need to acquire during the year. With a conversion rate of 1%, you would need to drive 100,000 impressions to the landing pages/social media efforts in order to get 1,000 new customers.
So let’s look at the overall logic so far;
Total Marketing Budget: $6,000,000
Amount of total budget allocated for social media: $600,000 (10%)
Customer Lifetime Value: $6,000
Target Customer Acquisition Cost: $600
Number of new customers needed to generate a positive ROI: 1,000 +
These numbers assume you’ve allocated 10% of your total marketing budget to social media which covers paid media on Facebook, Twitter, Linkedin, etc. plus costs for producing the campaign.
If you spend $600,000 on your social media content, you expect those campaign(s) to drive at least 100,000 prospects to your landing page, with a conversion rate of 1%. It’s really that simple.
So now it’s your turn to put together your numbers so you have a clear picture of where you need to go in the upcoming year to reach your customer acquisition goals.