The thumbnail version:
- Customer Acquisition Cost is an important measurement
- If acquisition cost exceeds the benefit, the acquisition makes no sense
The full version:
If yours is one of those reactive shops where everyone sits around waiting for business to turn up, then this post is not for you. But if yours is one of those proactive shops hustling for growth by acquiring new customers, then the concept of Customer Acquisition Cost (CAC) is something you should know about.
Roxanne Voidonicolas writing for Shopify, defines CAC as the cost to your shop of acquiring a single customer. She includes in those costs: ” . . . product costs, labour costs, marketing costs, and any other cost that contributed to getting your product into a customer’s hands.”
If you know your CAC, then you have an idea of how much you must earn from each customer in order to have a profitable shop. In other words, if you’re spending more to acquire customers than customers are spending on your shop, your business model is not viable.
I would suggest though one exception to this viability concern is if the new customer has a high likelihood of becoming a repeat customer which would obviously amortize the CAC.
I’ll address this important concept in more depth in upcoming posts, but in the meantime, here is a basic formula that explains the CAC concept:
Total Marketing spend ($500) / New customers (10) = CAC ($50 per customer)