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5 things that might be wrong with your customer acquisition cost formula

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Written by Flying Saucer Studio

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It’s fair to say that about 50% of our clients and collaborators all have customer acquisition at the top of their priority list. That’s why, this month, we’ve published a series of helpful guides and articles about all things customer acquisition. We’ve covered the basics with our Friendly guide for startups, we’ve outlined some strategies that you can test and we’ve helped you transition from acquisition to retention.

 

Of course, we’ve also covered some of the basics of calculating CAC (customer acquisition cost), but are you really doing it right? The formula can seem so simple, but a closer look reveals countless opportunities to overlook expenses you need to be considering in your calculations.

 

To help you generate accurate results and trust your numbers, let’s discuss the 5 common mistakes that might be affecting your startup’s current customer acquisition cost formula.

 

Mistake #1: Not considering salaries

The calculation of CAC should include all of the salaries of sales and marketing teams. If you have part-timers, consultants, freelancers or employees who contribute to marketing and sales - but are a part of different departments - you’ll need to include their salaries in your formula too.

 

Mistake #2: Not including rent, equipment & tools

Though perhaps not as blatantly obvious, marketing and sales team costs include rent, equipment, incentives and tools. Consider all of the elements you provide and pay for in order for them to create great work, and toss them in the marketing expenses section of your CAC formula.

Don’t forget to factor in the cost of that fancy cereal bar you set up in the staff kitchen too!

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Mistake #3: Not including cost of support & product development

Spotify, MailChimp and Skype all use a freemium business model – offering free basic services, along with paid features for premium subscriptions.

In most cases, the cost of support, engineering and product development are not included in the cost of acquisition. However, since free features are a part of your customer acquisition strategy, it makes sense to consider the expense of maintaining and supporting the basic product while you funnel them towards a paid product.

 

Mistake #4: Not including customer success costs

Many B2Bs and B2Cs have sales teams with various functions. Some are focused on retaining customers, some interact and onboard new customers and some re-engage with those who are losing interest to capture their interest in the brand’s products and services.

The question is: should all customer success costs and sales teams be included in the cost of acquisition? We say that if customer retention and recapture are included in your current customer acquisition process, it makes sense to include these factors in your CAC calculations.

 

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Mistake #5: Not considering the length of the customer acquisition journey

One of the most common mistakes we see when calculating CAC is not taking into account the time it takes to acquire a new customer.

In B2Cs, the buying journey might be short and linear. A customer could purchase your product after they see it on Instagram or Facebook, converting them after just a few clicks. In this scenario, you can opt to disregard the time spent between first-contact marketing and customer acquisition.

Startups that sell software and tools, however, often find that customer acquisition can take anywhere between 1 to 3 months, or more. This is especially common for products that have a free 15 to 30-day trial period.

If you do need to consider the cost of that conversion window, how do you integrate it into your CAC? The talented Andrew Chen shared the following formula on his blog.


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With his amendment, the CAC equation would be as follows:

CAC = (Marketing Expenses (n-60) + 1/2 Sales (n-30) + ½ Sales (n)) / New Customers (n)

n= Current Month

 

Why is this important? Consider a SaaS company that takes 60+ days to acquire a customer. Let’s say, you upgraded your customer acquisition strategy by offering a free trial for the month of March. That campaign could mean accumulating marketing expenses worth $32,432.

 

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If you calculate the CAC during that same month, you won’t break even. Realistically, the numbers show you only attracted the usual number of qualified leads because your strategy is just kicking off.

In this case, let’s say it takes 2 months for your free trial to generate results, after which you gain 643 customers. If you consider that journey when calculating CAC and stretch your expenses across an adjusted timeframe,  you’ll get accurate data on whether your marketing tactics are worth the cost.

 

Andrew Chen’s helpful blog post features a spreadsheet that business owners can copy and modify for their own calculations! Check it out here

 

Ready to up your customer acquisition game now that you’ve got the proper data in hand? Head over to our Friendly Guide to Customer Acquisition for great tips, strategies, cheat sheets and GIFs!

 

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Article written by Monique Danao

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