Customer Acquisition Cost | How to Calculate it with an Example - YouTube

hey everyone eric here in this video we're gonna breakdown customer acquisition cost

by the end of this video you'll understand both how to calculate cac and its variations

as well as what digital marketers and venture capitalists are trying to understand when

they talk about cac specifically at startups that are scaling rapidly ok lets get started

so at a very high level customer acquisition cost we call it cac is just how much the company

needs to spend in advertising to get one new customer to buy for their first time and the

reason this is important is because if you know what your customer lifetime value is

and so this is basically all of the purchases on average will make during their lifetime

or their relationship with your company then you can compare that to your marketing costs

on that first order to try to figure out what's the maximum we can spend in marketing to bring

a new customer into the company and still make money on our relationship so let's say

you expect a customer to spend $1000 well then you know you know over a number of years

you know how much you can spend in marketing to try to get a new customer so its super

super important also you might think that cac is just total marketing costs divided

by total customers that's actually completely incorrect so let's walk through this right

now and just to jump to the finish before we start first off when people say cac they

are really referring to blended cac so we're gonna break that down right here as well as

some other cac versions that are important but you need to know that cac is blended cac

so here we are first off if you like this content please like this video and subscribe

to my channel it would really help me out and i'll keep making content like this okay

so to calculate cac you need two things you need your marketing costs which we have here

and then you need customer order information so total customers and um we also have total

orders and so like i said its not just taking your total marketing costs and dividing it

by total customers that's wrong so i'm gonna tell you right now what you actually need

to exclude so in marketing there's basically two buckets you have paid advertising so your

advertising channels facebook google could be amazon reddit pinterest radio television

anything where you pay for uh uh a customer like a new customer to get an ad put in front

of them sort of in any medium in any format where customers are advertised to you pay

for those placements so that's paid advertising and the other bucket is like other marketing

so stuff that's not related to actually putting ads in front of customers or what we could

call serving ads these are things like agencies like you'll probably hire like a lot of consultants

specialists who know how to run like facebook or pr or whatever it is but that's just compensation

you're just like paying them a fee um and then you'll have like marketing payroll so

your vp of growth or whatever it is like should you be including that the salary of a person

in how much it costs to acquire a new customer well the answer is no because that you know

salary that you pay someone does not go towards advertising to customers so you're trying

to figure out what's your paid advertising um because that is really the thing that's

bringing customers into your company and then when we look at the sales information theres

sort of two buckets you have customers which we call users in ecommerce and then you have

orders so a lot of people use orders to calculate their customer acquisition cost its completely

wrong do not do this you need to use customers so these are individual people that are making

purchases and the reason is that a typical customer will purchase multiple orders on

average so if they go to a grocery store or they go to amazon or they go to you know whatever

it is they will probably buy a couple things and so that will really distort your numbers

and make them make no sense at all so you need to look at the individual people and

then within that theres two buckets you have brand new customers which are people buying

something for the very first time with your company and then you have returning customers

which are people making subsequent purchases you need to exclude returning customers because

we're trying to figure out how much does it cost to get one new person to purchase and

if you include returning customers its gonna again its gonna distort that cost its gonna

make it look lower but uh so we need to exclude those people we need to exclude orders and

within new customers we have two basically main buckets so we have new customers from

paid channels um so these are people who came directly through paid advertising channels

and we can track that so we can see how many people clicked a google ad and then and then

purchased we can see how many people clicked a facebook ad and purchased or were advertised

on television and said hey you know come check out our company at whatever dot com slash

tv we can see how many people hit that page and then purchased so we can know how many

people came directly through these paid channels and then there are gonna be a bunch of customers

who come through what we call organic channels which are unpaid channels so things like coming

through google just by googling around and then coming to our website and purchasing

like that's free then you have things like referrals word of mouth most companies have

like around 40% of their sales coming through these untrackable channels that are just like

free channels so that's what organic customers are so you're going to just include all those

together and so for blended you want to look at ok what did you spend in advertising divided

by how many customers purchased for the first time and that's $80 and so we know that it

costs $80 to bring in one new customer so if we just copy this out I hit control c held

down shift tapped the right arrow right here and then control v copy paste so you can see

our customer acquisition cost it it went from $80 and then it went down into the 60s and

it went to 84 and you'd have to look at sort you know why oh look you know our organic

customers went to 100 and they went down and you know what's going on there of course dig

into all this stuff but another metric that's really important is paid customer acquisition

cost so this is basically just a measure of how well your paid channels are working so

you look at just your paid ads and you divide it by just your paid customers and so if we

hit control c copy um shift right arrow control v paste you can see that our paid customer

acquisition cost is sort of shifting around over time and going down a little bit and

so why do we want to look at these metrics and why do we want to look at them over a

period of time well of course we want to know is your business profitable on their relationship

with one customer but probably the most valuable thing you can find out about this is what

happens to your customer acquisition cost as you scale so the fear of most founders

venture capitalists startups ecomm companies etcetera is that your customer acquisition

costs start to go up really fast as you scale so um if you try to go from 1,000 customers

to 100,000 customers that your customer acquisition cost will skyrocket if you're a company if

you can prove that your customer acquisition cost stays stable as you grow then that basically

means that your future value could be absolutely enormous but if your customer acquisition

cost skyrockets in excess of your customer lifetime value then basically your business

will not be able to grow so a lot of the questions that companies are trying to figure out are

are around like how much can we scale our number of customers before our customer acquisition

cost you know goes up really fast so that's basically the main question that companies

are grappling with so i hope you learned a ton in this video about how to calculate the

customer acquisition cost by the way in the description below you can download this excel

file for free if you want to put in your own numbers from your own business and play around

with it i've also linked to some of my other startup and finance focused videos as well

like i have a video about the customer lifetime value and some other stuff on ecommerce check

those out in the description and if you found this content valuable please subscribe and

click the alerts notification like this video and leave me a comment below and also check

out my online courses if you need to improve your excel and finance skills that's all for

today thanks for watching and i'll see you in the next video