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Understanding the Average Customer Acquisition Cost of Different Marketing

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Before tackling the average customer acquisition cost of various marketing products and services, let us first understand what acquisition and customer acquisition cost is about. In this article, we will be discussing how to calculate acquisition cost, how much you should spend, and identify whether your stats is raising the bar.

What is Customer Acquisition? Also known as CAC, this is the cost that consumers have to pay to purchase a certain product or service. Generally, consumers are convinced to buy the business with a package inclusive of costs in marketing, research, accessibility and so forth. With this purchase, the buyer must have a return of investment from the expense they have made. The customers are then given a profit that is calculated through customer valuation which is the basis of the company of how much of their resources must be allocated to the said customer. CAC is also deemed as a ratio that companies use to identify how much the customer is worth in their business.

CAC increases over the years as the business of the company matures. Within the life of the business, there could also be diminishing returns depending on their possible distributions and growth. Typically, CAC is used in online marketing or eCommerce and is usually in conjunction with software sales, B2B, SaaS and the like. Major firms and business magazines publish these metrics to help companies identify if they are generating or losing income.

For those who are starting up in the affiliate marketing world, it is crucial to understand the growth of your business through CAC and at the same time it is highly essential to know the basics. This way, you would be aware whether or not your product or service is effective or it is simply bad in your business. About 50 percent of small companies have failed simply because of the lack of knowledge about CAC. Other than that, knowing your company’s CAC would help you determine how much you have to invest as well as give generous returns.

That being said, you must be familiar with calculating your customer acquisition cost. First, you must take note of your expenses including the marketing practices or activities you made to generate leads and customers. At the same time, check how many customers you made for every marketing channel used. Finally, divide your expenses for each marketing channel by the number of customers you made. The quotient is then your own calculation of the CAC in every marketing channel. Here’s the formula:

CAC = marketing expense / marketing channel

After finding out what your CAC is, it is time to identify if you are making a good profit out of your marketing channels. The trick is to check on three things, your CAC, how much the customer paid in the service and how much you made in the transaction. If your CAC is less than your profit from every customer, that means you're in good shape! Do the same to all your marketing channels then get the average.

Now that you’re done with the root-cause analysis, it’s time to decide which of the channels you should invest more. Getting these figures will point you to the right direction – which product is more likely to expand, maintain or even eliminate. That being said, you must not overlook keeping your customers in place.

In a business, having regular customers who stay and ask for more means they are happy campers. They are satisfied with the product or service that you provide them. Hence, retaining them is also important. We are all customers and what's keeping us buying the same product or going to the same store for years is due to customer centricity. We love being valued, treated with respect, and given what we want and need. Of course, this goes the same to your customers. Take note that they want fresh ideas so always develop and innovate your products and services, otherwise, your business would hit rock bottom.

This means you should familiarize yourself with your customer lifetime value. As a business owner and marketer, this would help you pinpoint how much money you should spend to gain new customers and keep them for long term transactions.

Two other things you should take into consideration are your Customer Lifetime Revenue and your Lifetime Fulfillment Cost. What are these variables? Let’s discuss this further.

Your customer's Lifetime Revenue is the average income you get from your consumers all throughout their years of loyalty to you. To put this into numbers, take the average amount of their purchase, how often they purchase your product and the number of years you expect them to stay as a customer. The formula is:

Customer Lifetime Revenue = Avg Purchase Amount x Annual Purchase Frequency x No. of Years should the Cust Stay

Finally, you must also check on the Lifetime Fulfillment Cost for you to know how much you should spend to support your customer. This includes processing fees, shipping and handling fees, and all other cost of goods that were sold. In other words, this is the cost that is being taken away from you. To come up with this figure, add all the costs and fees you made. Multiply the sum and the number of purchases they made. Then there goes the answer.

Lifetime Fulfillment Cost = Total Costs x No. of Purchases

Go ahead and do the math, explore and discover how you would successfully hit the mark. See how you would measure and balance your expenses and if your money is being placed to good use. All of these figures are identifiers to make sure that your business is booming, not going to the opposite direction.

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