How to Measure Customer Acquisition Cost

How to Measure Customer Acquisition Cost

May 8, 2019 3:00 pm

Ecommerce entrepreneurs use many techniques to draw new clients, together with pay-per-click on promoting, search engine marketing, content material marketing, and show promoting. However how does an ecommerce firm determine which of those marketing techniques work one of the best?

Buyer acquisition value helps to reply this query. CAC is a key efficiency indicator for ecommerce marketing. It estimates how a lot to take a position to draw one new buyer. One might say CAC seeks to explain advertising effectivity.

CAC Calculation

Calculating CAC is just a matter of division. An ecommerce enterprise would take its complete promotional prices for a given interval and divide these prices by the variety of new clients.

Promotional prices ÷ Variety of new clients = CAC

The result's CAC. It ought to be in comparison with the enterprise’s common estimated buyer lifetime worth or its common order worth. Which comparability an internet service provider makes use of might rely upon the corporate’s enterprise mannequin or how lengthy it has been working.

Right here is an instance. Think about a web-based retailer has been working for 3 months. Throughout these three months, the enterprise invested $10,000 in advertising and purchased 2,351 new clients.

10,000 ÷ 2,351 = four.25

The corporate’s CAC is $four.25. On this case, the brand new service provider might not have sufficient info to undertaking an estimated lifetime worth for every buyer. However the service provider does know its common order worth was $seventy six and its common value of products bought was $forty two. Thus, the corporate has a gross margin of $34 per order. Spending $four.25 in promoting to get $34 in gross margin can be a very good advertising funding.

Channels, Techniques

CAC is usually most informative when it's used with different KPIs to match advertising channels, campaigns, or techniques.

Right here is an instance that compares techniques for a brick-and-click on retailer. On this made-up state of affairs, the corporate has 4 vital promoting initiatives: (i) a round that's distributed by way of newspaper to 250,000 houses, (ii) a Valpak direct-mail marketing campaign to one hundred,000 recipients, (iii) a Google PPC marketing campaign, and (iv) a YouTube marketing campaign.

Based mostly on the hypothetical values under for a month’s value of overhead, labor, and promoting value (which incorporates manufacturing and printing), ought to the corporate rethink its promoting? In all probability so. The corporate spent $forty eight,775 for a newspaper round that generated simply one hundred twenty five new clients.

 RoundValpakGoogle PPCYouTube
Complete Advert Value$forty,000$three,999$10,000$10,000
Complete Advertising Value$forty eight,775$5,049$10,750$14,250
New Clientsone hundred twenty five2,9501,935three,four hundred
Buyer Acquisition Value$390.20$1.seventy one$5.fifty six$four.19
Common Order Worth$fifty five.00$ninety eight.00$seventy six.00$seventy eight.00
Value of Items Bought$33.00$fifty eight.eighty$forty five.60$forty six.eighty
Gross Margin$22.00$39.20$30.forty$31.20
Revenue after CAC-$368.20$37.forty nine$24.eighty four$27.01


Advertising Prices

CAC, nevertheless, can simply be underestimated. Typically ecommerce companies will overlook bills immediately associated to attracting new clients, resembling:

  • The price of putting advertisements.
  • Advert manufacturing prices.
  • Labor for advert design and copywriting.
  • License charges for graphic design software.
  • Wages to put and handle advertisements.
  • Subscription charges for advertising software to plan, check, or place advertisements.
  • Salaries related to advertising technique and administration.
  • Related customer support bills.

Briefly, an ecommerce enterprise might need to embrace any buyer-acquisition-associated bills, wages, and overhead in a CAC calculation.

Together with these things, nevertheless, may be difficult, notably once you need to examine particular ecommerce advertising techniques.

Estimating Labor

Now, look again on the instance campaigns above. Discover the instance divides labor and overhead by marketing campaign. That is necessary for particular campaigns or techniques.

There are a couple of methods a enterprise can estimate labor prices by channel. For instance, to estimate the wages and salaries related to every marketing campaign, a enterprise might implement time monitoring. Utilizing some type of time monitoring software, ask related personnel to trace their time for one month.

When a graphic designer works on a junk mail design, she tracks it. When a author polishes a pay-per-click on headline, he tracks it. On the finish of a month, the enterprise could have sufficient knowledge to assign a mean worth to a activity. It might decide, for instance, that writing a PPC advert takes about quarter-hour. Thus if a marketing campaign required eight advertisements, it might value about two hours in labor.

Estimating Overhead

Bills reminiscent of lease and utilities can be estimated for CAC calculations. Right here is an instance.

Think about there's an ecommerce enterprise with 4 staff. The enterprise rents an workplace for $1,450 per thirty days. Assuming every of the workers has equal sq. footage, the lease is $362.50 per worker. If a typical worker works 172 hours per thirty days, his or her share of the lease is $2.eleven per hour. A process that takes quarter-hour — comparable to writing copy for a PPC advert — ought to embrace fifty three cents in lease for CAC functions.

Comparable calculations may be executed for utilities, espresso service, gear, and comparable if a enterprise chooses to affiliate these with CAC.

Hassle Spots

Like so many KPIs, CAC may be misinterpreted. Because of this, it is very important think about CAC in context. If, for instance, a enterprise is contemplating CAC for Might, it wants to make sure that the influence of a marketing campaign is felt in that month. Some types of advertising make take greater than a month to develop a sale.

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