OK so Patti Page was singing about doggies, and we are talking about clients. But wouldn’t it be nice to window shop and cherry-pick our clients? Unfortunately, that is not the case and we need to get them the old-fashioned way—we need to earn them. But at what cost?
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 it?
Quite simply it is defined as how much you spend in marketing to attract a new client.
CAC is calculated by adding up all 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 (let’s be honest, 2020 and 2021 were a bust). You spent $25,000 on sales and marketing for the period. And be sure to include all 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 resurfaced) 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 and run a report for those 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. That’s pretty good! But say that those same 400 new clients purcahsed airfare only for one trip during that period. Your only revenue is the $40 fee you charge. $16,000/400=$40.00 ATV.
Can you see the problem? You are (in a surreal sense) paying the client $22.50 to do business with you. Is that business sustainable? Something needs to change.
Your job—change it.
The easy, mathematical answer is to spend less on marketing or turn away clients. Not the best idea if I say so myself. But, there are other ways. Take a look at 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 prior to a cruise is so critical? Find out why you cannot cover the cost of acquisition and fix it! If it is really close, it might be as simple as changing up your website hosting to a less expensive provider or plan. Look at all the angles.
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, so you must make sure that you are earning money on each customer acquisition.
