The cost of customer acquisition (CCA) is the average price of acquiring a new customer. The cost of customer acquisition is a fundamentally important metric for a business of any size. It is vital to know your or your organization's cost of customer acquisition in order to effectively execute.
Why Calculate Your Cost of Customer Acquisition?
The cost of customer acquisition (CCA) is a fundamentally important metric that will allow you and your firm or organization to:
How to Calculate the Cost of Customer Acquisition
To calculate the CCA you only need two ingredients:
We left out one thing above - the time period. Over what time period should you get the above two metrics? The most obvious and safe answer is 1 year - it's not too long and not too short and will generally allow for seasonal cyclicality to not skew the numbers up and down. You don't want to use a timeframe that's too short - doing this for one month (let's say December) could cause miscalculation due to cyclical changes that might have an impact on how easy or difficult it is to attract customers in December. For example, a retail location might find it far cheaper to attract customers during the holiday season because foot traffic increases in malls and shopping boulevards. If this is the case, using numbers from only December would cause the CCA to be lower than it really is over a longer period of time.
However, you know your business and you should be the final judge of the timeframe. You might feel that a 2 or 3 year timeframe is more appropriate do due longer run cyclical aspects to your business that might affect customer acquisition.
It is important to remember that the times must match above - if you are using the total spend for 1 year you must make sure that you are also using the total number of new customers for that year as well.
So, we now have two metrics - PS and NC, representing the total promotional spend and the total number of new customers respectively. In order to calculate the cost of customer acquisition, we simply divide PS by NC in order to get the total money spent per customer:
CCA = PS/NC
It seems quite simple - just divide PS by NC - but the CCA calculation can be quite a bit more complex than simple division if you want to calculate your CCA properly.
Obtaining Accurate and Quality PS and NC Metrics
In order to properly calculate your cost of customer acquisition, you need to make sure your PS (total promotional spend) and NC (total number of new customers) are accurate and quality metrics. This might be easy for some firms and organization but difficult for others. Let's dig into the main points we need to consider:
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