Customer acquisition costs

Customer acquisition cost (CAC) is the cost of persuading a consumer to buy your product or service. It is calculated by dividing total acquisition expenses by total new customers. However, there are different opinions as to what constitutes an acquisition expense. Market research and advertising costs would almost always be included, for example, whereas rebates and special discounts might be left out as they do not involve active spending. With modern technology and the plethora of data now available, it is possible to calculate CACs more accurately than ever before, which in turn allows businesses to spend their marketing budgets more wisely.

Acquisition costs can vary significantly from industry to industry, and the methods of measuring them from company to company. It is therefore crucial when researching potential acquisition costs for a prospective venture that you understand exactly how any data you find has been created. Furthermore, it is futile trying to calculate or manage CACs for your business if you have no accurate way of telling how many customers each form of advertising generates.

For example, CACs for a campsite could be as much as £7 when traditional print advertising is used. This is largely due to print advertising being priced on the basis of the number of people who will see the advertisement. Internet advertising, on the other hand, is priced according to the number of people to whom the advert is useful ( those who click the link to your website) and this can reduce CACs to as little as 15p per customer. With no guarantee of repeat business and an average spend of around £20 per customer, print advertising looks very expensive indeed. />

On online service provider which aims for long term monthly subscriptions, on the other hand, can afford far higher CACs. Netflix, the online DVD rental company, has CACs of around $30 (£15). This is calculated simply by dividing total marketing spend by the number of additional subscribers in the same period, and careful monitoring has shown that despite a gradual drop, the CACs for Netflix have remained more or less constant. This has enabled the company to concentrate more on retaining customers, rather than throwing more money at marketing which may well have no effect.