Do you know how much your e-commerce made with its last sale?
Better yet, do you know how much you really made from your last sale?
Many e-commerce owners make the same mistake when analyzing their profitability since they just work out the cost of the product, shipping, and their own salary – but they leave out something crucial: customer acquisition cost (CAC).
If you invest €50 to get a client but your average checkout is €35, there’s something wrong, right?
In this article, we’ll tell you all about customer acquisition cost: what it is, how to calculate it, and, more importantly, how to use it to increase your business’ profitability.
Let’s get to it.
What CAC (customer acquisition cost) is
Customer acquisition cost (CAC) is the total investment you make to turn a potential buyer into one of your customers.
That is, the total cost of everything you do to get a new client.
What’s essential to know here, however, is why this is important.
It’s important because it has a direct impact on your business’ profitability.
Measuring your shop’s average CAC is fundamental to see whether what you do is profitable or not. You wouldn’t want to invest in getting clients to then find out that they spend less in your shop than what you invested, right? 😉
But first, let’s see how to calculate it.
How to calculate your e-commerce shop’s CAC
The formula to calculate your customer acquisition cost is fairly simple. You just need to work out the total marketing and sales expenses and divide the result by the number of new clients.
In other words:
CAC = (Marketing Costs + Sales Costs) / New Clients
So, what should be included in that sum?
Anything you want, basically.
Let’s start off with something simple so you understand: at very least, you need to know how much you spent on your last marketing campaign.
That should include every channel you used:
Once everything’s ready, you add it up and divide it by the number of clients you got thanks to those efforts.
But CAC is not only calculated for each campaign. You can also measure it by quarters, semesters, or years.
Our recommendation is that you do it frequently so as to know if your efforts to gain new customers are worth the investment.
Also, it’s a good idea to measure each channel’s performance. This way you’ll see if, for example, Facebook Ads are more profitable for you than writing articles, or which of your affiliates are bringing you higher quality clients.
This is the basic calculation, but you can always make it more precise.
For example, hiring external professionals (designers, editors, copywriters, etc.) to help you get new clients is also considered a marketing expense.
And if you want to be even more exact, you can include the cost of your server and web domain because you’d hardly have any clients without a website, right?
The formula is the same in all cases, though. The expenses you choose to include are the only variable item in the initial sum.
Don’t forget that the acquisition cost is only calculated when a potential customer makes his or her first purchase from your e-commerce. Repeat customers are not included in the formula (actually, they are, but in a different way. We’ll see that later).
An example of customer acquistion cost
If you’re struggling to fully grasp the exact definition of CAC, then an example will surely help you understand it better.
Let’s suppose you own an online sports store. You decide to launch a campaign to capture new clients and sell winter sports equipment from October to December.
Your basic expenses for those three months would look more or less like this:
- SEO articles about winter sports (outsourced): €250
- Facebook Ads campaign: €420
- Google Shopping campaign: €340
- Email marketing payment tool: €60
- A marketing worker’s salary: €3,300
- Clients acquired: 15
The total sum of these expenses is €4,120 in three months. If you divide that by the number of clients acquired during the campaign, you’ll see that your acquisition cost amounts to €275 per customer.
If you subtract what that particular customer spends on your online shop, you’ll get the actual profit of the sale.
What if this one customer has only spent €180 on some skis, for example? Then it looks like the campaign hasn’t been very profitable, right?
Of course, this changes if you sell luxury items for €3,000 each. In this case, a client for €275 is a bargain.
But let’s take it a step further:
What if that same person that bought those skis comes back after four months and places another order worth €350?
All of a sudden, the client you thought to be unprofitable makes a second purchase and surpasses the acquisition cost.
But does that mean it’s profitable?
How to know if your e-commerce customer acquisition cost is good
As you’ve seen, calculating the CAC of a campaign or a specific time period is quite simple. You just need to know how much you’ve spent on each channel and divide it by the number of new clients it brought you.
Finding out if the investment has been profitable is more difficult.
Even if a client hasn’t spent much, he or she may keep buying from you for one or two more years, which would mean you’ve covered the customer acquisition cost.
Besides, you know fostering client loyalty is much more profitable than capturing new clients [In Spanish]. To put it another way, it’s easier to sell more products to someone that already knows and trusts you.
If you’d like to learn how effective your campaign to attract new customers has been, there’s another element you should bear in mind: the client’s lifetime value (LTV).
What? Even more jargon?
Yes, but this one’s also easy to understand, as you’ll see. 😉
In case you don’t know, this term refers to the potential revenue you’ll get from a certain user for as long as he or she remains your client.
For example, imagine the sportsman that bought those skis during the winter sports campaign keeps buying from you for two more years. In this period, he makes three purchases every year and generates a €104 profit margin (we’re dealing with profits here, not revenue) for each purchase.
If you multiply all these figures, the result is €624.
That’s the average amount you’ll actually get from each customer during his or her lifetime as a client. If you subtract the acquisition cost, the total profit is €349.
We know what you’re thinking: that profit margin after two years doesn’t look so profitable.
And you know what? You’re right.
For your business to be sustainable in the long term, the CAC shouldn’t add up to more than 10% of the LTV.
In other words, if each person spends about €642 during their time as one of your customers, the acquisition cost shouldn’t exceed €64.
Since that figure is still far off, let’s see how we can improve it.
How to improve your e-commerce CAC
If your CAC is more than 10% of the LTV that we spoke of, it’s important that you take action to fix the imbalance and enhance your profitability.
>Here are some of the things you can do:
If the CAC is too high
- Prioritize the most effective channels: Not all acquisition methods are equally effective. Analyze them separately to figure out which of them bring you more qualified clients.
- Improve your conversion: Sometimes it’s the message that is off-target and not the channel. For example, you can try using copywriting more often for your product cards or ads, or running A/B tests to see which ones work best. You should also check out this post on how to improve your conversion rate.
- Focus on user experience: Unintuitive designs, long checkouts, or confusing web architecture are some examples of how a bad user experience can cause you to lose clients.
- Use a professional search engine: Doofinder can increase your sales by 5-10%. And the best thing is that you can try it one month for free if you click here.
If the LTV is too low
- Tighten bonds with your clients: Keep the communication with your clients active through an email marketing strategy. Send newsletters sharing useful information about your products or topics that interest your buyer persona. What’s important is that you stay fresh in their minds.
- Foster client loyalty: You can offer discounts, of course, but clients often prefer other kinds of actions or initiatives. Special types of packaging or VIP memberships to strengthen their sense of belonging are two interesting ideas you can implement.
Now do you understand why CAC is so important?
Acquisition cost is one of the most important metrics for every e-commerce shop since it, together with Customer Lifetime Value, defines your shop’s profitability.
Implement all the tips we’ve given you and you’ll see your profits increase. ;)