Not knowing how much that new customer costs you!
The Problem. If you don’t know your Customer Acquisition Cost (CAC) and how it reflects the viability of your business, you are destined for doom.
Let’s take a moment to define what CACs are. According to Investopedia.com, a well-used source for anything investment related, CACs have two major definitions. For this topic, we’ll focus on the second definition which states,
The cost of a business to acquire a new customer. The company recognizes costs, including marketing and incentives, to introduce new customers to the company’s products and services. The customer acquisition cost is calculated by dividing total acquisition costs by total new customers over a set period of time.
CACs are great indicators or reflections of how viable your business is.
The Solution. Know your CACs. Simply put, if your CAC levels are too high the odds are you’ll eat into your profit margins. This may ultimately reduce your effectiveness and in a worst case scenario, create losses which you may not be able to recover from. It happens way too often when businesses forget the value of keeping CACs down and end up having to close shop. The most basic formula for any business to work is, keep cost down and keep margins feasible.
But what about “it takes money to make money”, spend, spend, spend…?
Knowing your CAC and keeping it down is not the same as reducing your spending. In fact, knowing your CAC levels allow you to spend more, effectively. It gives you guidance on where your funds need to be allocated in order to see customer spending increase, resulting in higher revenue streams. It reduces headaches of not knowing where your money is going and allows you to hone in and conquer what most small business owners fear, the dreadful return on investment issue.
The benefits of knowing your CACs.
Data is king and the benefits of knowing your CACs are tremendous. For instance, if you’re looking for ways to lower your bottom line and increase your margins, calculate your CACs. Find out which area is operating with great results and which area is on the short end of the stick. Then, simply remove the area that isn’t producing.
At this point you can take two routes, 1) allocate the funds which were previously used for the failing area towards a productive area or, 2) just completely cut out the fat. Both routes are win-win scenarios and will either allow you to produce more or keep cost down.
In the end, when you start looking through the lens of how everything effects CAC, you’ll learn to see the major value of this key metric. Eventually, you’ll know the exact numbers of peak and floor CACs for your business to operate in constant profits. Furthermore, knowing these numbers will help guide the decision making process when taking on new ideas to gain new customers.