OK, so the whole Pythagorean Theorem never played a role in your life beyond eighth grade. Maybe you never needed to rely on Ohm’s Law beyond Physics 101. You might even have trouble balancing your checkbook at times (does anyone still do that?). But if you are in business for yourself—full or part time…home or office based, here’s some math you need to know.
Clients are hard to come by. So when you get one, be sure to hold onto them. Clients are also expensive to come by. So make sure your money is spent wisely. Wait! What?
Have you ever stopped to think how much it costs to get that client to walk in your door, click on your website or react to that newsletter?
Customer Acquisition Cost (CAC) is one of the most important numbers you need to know as a business owner.
What is customer acquisition cost?
Quite simply it is defined as how much you spend in marketing to attract a new client.
CAC is calculated by adding up all of your marketing and sales costs and dividing them by the number of new customers acquired for a certain period of time. Here’s the formula:
Marketing Spend / New Clients = Customer Acquisition Cost
Take the last quarter of 2019. You spent $25,000 on sales and marketing for the period. And be sure to include all of the costs—website hosting, newsletter, postage, advertising, co-op, tags, events, displays, and yes…even your time.
And over the period, you had 400 new clients (you might also include stale clients that have not purchased in many years) purchase some sort of travel. $25,000/400=$62.50.
Good, the cost to acquire a new client in 4Q 2019 was $62.50. Now what?
Look at the average transaction value (ATV) and see where you stand. What’s ATV? Jump into your CRM of choice and run a report for the new clients and divide the total commissions received or expected, by the number of new clients. Remember, this is not about sales, but revenue.
Total Commissions / New Clients = Average Transaction Value
OK, let’s say you received or are expecting $62,000 in commissions. $62,000/400=$155.00 ATV. Pretty good! But say that those same 400 new clients were looking at airfare only for one trip during that period. Your only revenue is the $40 fee you charge. $16,000/400=$40.00 ATV.
Houston, we’ve got a problem. You are spending $22.50 to acquire a client with less than nothing to show for return. Is that business sustainable? Unless there was some mitigating circumstance, my guess is no. Something needs to change.
Your job is figure out what needs to change. It could be your marketing vehicles, it could be your suppliers, your sales staff (not selling insurance or not acting as a consultant), it could be your product mix. Did you add on a car with that airline ticket? Did you explain why a pre-stay in a departure port is so critical? Find out why you cannot cover the cost of acquisition and fix it!
Acquisition cost is a one-time cost and hopefully the client will be back again. But, that is never guaranteed as today’s consumer is bombarded with offers more and more frequently. Don’t believe me? Google “Best Email Marketing Software” and let me know how many ads for Constant Contact, Mail Chimp Emma, and the rest show up in your Facebook feed.
There are ways to make sure your CAC is lower than your ATV and next week, we’ll talk about them.