New Customer Acquisition Cost is the amount it costs you to get each new customer. You can directly amortize specific marketing efforts to the number of customers you get to determine your customer acquisition cost. If you spend $1000 in marketing and get 10 new customers, directly from that initiative, your customer acquisition cost is $100.
Your Customer Acquisition Cost in itself really means Nothing.
It’s just a metric for you to help monitor your progress, success and to adapt to make your business more efficient. Many times you will not be able to directly ascertain your CAC because a new customer may purchase only after being contacted through a number of different marketing initiatives. It’s important to ask how new customers heard about you, so you know where to focus your most effective marketing efforts and dollars. Over the long run, try to get an estimate of what your CAC is, but don’t worry about it too much. Ultimately, we want to lower the ratio of your new Customer Acquisition Cost compared to your Profit, by generating as much revenue as possible from each new customer…
- Get as much repeat business from each new customer via future discount codes, thank you coupons, etc. [UPSELLING]
- Increase the profitability of each sale new customer, for example, selling them a product with a higher margin. [UPSELLING]
- Sell them something else they may be interested in [CROSS-SELLING]
- Selling them additional products they may be interested in. [REENGAGE]
Let’s see how the concept of new customer acquisition rate may apply in the real world and how you can increase your revenue and decrease your average cost of customer acquisition. In this example,
- You spent $10,000 on pay per click advertising on Google.
- You get 10,000 visitors to your website.
- Out of those 10,000 visitors, you get 100 sales (a 1% Conversion Rate).
- At this point your new customer acquisition cost is $100 per customer.
- Each customer purchases, on average, a $500 product or service.
- On average, you upsell them your platinum product for an additional $100. [UPSELLING]
- On average, you cross-sell them a similar product (that other people who purchased the Platinum product have also purchased) for an additional $100. [CROSS-SELLING]
- After the sale, you send them a personalized thank you card with a discount code that gets them to come back to your website for another purchase, for $300. [REENGAGE]
- In these 2 engagements, you have made $1000 from this customer. This does not even include the Lifetime Value of the customer.
- Your New Customer Acquisition Cost is still $100, but you have made $1000 from the initial interactions in this example.
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