Do you know what your Customer Acquisition Cost is?
Customer Acquisition Cost (CAC) is the amount of money it costs to acquire each new customer. It’s important you know this number so you can decide if your marketing is working for you and if you are making money!
In this blog I’m going to talk about how you calculate this cost and what to do if you find that your cost is too high.
How to Calculate Your Customer Acquisition Cost
To calculate your customer acquisition cost (CAC), follow these steps:
- Determine the Time Period: Decide on a specific time period for which you want to calculate the CAC. It could be monthly, quarterly, or annually.
- Calculate Marketing and Sales Expenses: Add up all the marketing and sales expenses incurred during the chosen time period. This includes costs related to advertising, promotional campaigns, online marketing, events, sponsorships, social media/ad managers, and any other expenses directly associated with acquiring customers.
- Count the Number of New Customers: Determine the number of new customers acquired during the time period you decided on. This refers to the customers who were not previously engaged with your pet sitting business.
- Divide Expenses by Number of New Customers: Divide the total marketing and sales expenses by the number of new customers acquired.
Once you have calculated your CAC, it’s important to assess whether it’s too high.
Here are a few indicators that your CAC might be too high:
- CAC Exceeds CLV: If your customer acquisition cost is higher than the average revenue you generate from each customer over their lifetime (CLV), it can indicate an unsustainable business model. It’s important for your CAC to be lower than the CLV to ensure profitability and a positive return on investment. For example, if a customer costs $100 to acquire and they only book one dog walk at $30 then your CAC on that transaction is too high and you are losing money.
- Low Profit Margins: If your CAC erodes a significant portion of your profit margins, it suggests that your customer acquisition strategy may not be cost-effective. Aim for a CAC that allows you to generate a reasonable profit from acquired customers.
If your CAC is too high, here are a few strategies to consider:
- Refine Targeting and Segmentation: Ensure that you are reaching the right audience and segmenting your target market effectively. This will help optimize your marketing efforts and reduce unnecessary expenses. For example, you may decide that you don’t take bookings under a certain $ amount.
- Improve Conversion Rates: Focus on improving your conversion rates at different stages of the customer journey. Enhance your website, landing pages, and call-to-action messaging to increase the likelihood of turning prospects into paying customers. This blog post might help you with that.
- Referral and Loyalty Programs: Implement referral programs or loyalty programs to incentivize existing customers to refer new clients. Word-of-mouth referrals can be a cost-effective way to acquire new customers.
- Optimize Marketing Channels: Evaluate the performance of your marketing channels and allocate resources to those that provide the highest return on investment. Eliminate or reduce spending on channels that consistently yield poor results.
- Collaborate and Partner: Seek collaborations and partnerships with other businesses or organizations that target similar customer segments. By leveraging their existing customer base and networks, you can expand your reach more cost-effectively.
Regularly monitor and analyze your CAC. Aiming for an efficient CAC helps ensure the financial sustainability and growth of your pet sitting business.