User Tools

Site Tools


crm:metrics:acquisition_cost
  • Bookmark "Acquisition costs" at del.icio.us
  • Bookmark "Acquisition costs" at Digg
  • Bookmark "Acquisition costs" at Furl
  • Bookmark "Acquisition costs" at Reddit
  • Bookmark "Acquisition costs" at Ask
  • Bookmark "Acquisition costs" at Google
  • Bookmark "Acquisition costs" at Netscape
  • Bookmark "Acquisition costs" at StumbleUpon
  • Bookmark "Acquisition costs" at Technorati
  • Bookmark "Acquisition costs" at Live Bookmarks
  • Bookmark "Acquisition costs" at Yahoo! Myweb
  • Bookmark "Acquisition costs" at Facebook
  • Bookmark "Acquisition costs" at Newsvine
  • Bookmark "Acquisition costs" at Yahoo! Bookmarks
  • Bookmark "Acquisition costs" at Twitter
  • Bookmark "Acquisition costs" at myAOL
  • Bookmark "Acquisition costs" at Slashdot
  • Bookmark "Acquisition costs" at Mister Wong

Acquisition costs

The one of the main goal of a modern marketing is to increase the number of potential customers. In other words the e-companies tend to increase their income flow. By force of advertising or another marketing activity they want to be always in front of the customer's eyes. As a result, the number of advertising grows, the companies marketing budget increases constantly. In order to estimate the impact of such kind of company’s effort the Customer Acquisition Cost (CAC) Indicator is to be used. This is the cost to acquire a customer.1)

Top four Metrics

Within the e-commerce environment CAC is a top four metrics along with:

  1. Average Revenue per User (ARPU)
  2. Subscriber Churn (SC)

Interpretation

The cost of acquiring customers is at the heart of acquisition marketing. Sophisticated database marketing firms compute the cost of acquiring a customer and then trade it off versus the lifetime value of the customer. 2) The need to better understand customer behavior and focus on those customers who can deliver long-term profits has changed how marketers view the world. Traditionally, marketers have been trained to acquire customers, either new ones who have not bought the product category before or those who are currently competitors’ customers. This has required heavy doses of mass advertising and price-oriented promotions to customers and channel members. 3)

Method of calculation

The calculation of the cost of customer acquisition differ two values:

  • The costs for the employee’s salary and other overhead costs of sale
  • The cost of marketing, which include the advertising costs to attract the customers

The sum of marketing cost and cost of sale, we need to divide by the number of clients per month. This indicator and allow us to evaluate the cost of acquiring one customer. We can also compare these two values and if cost of sale is much more than marketing cost we can think about how to automatize the cost of sale, because they cause a large number of expenses. This cost can be managed be the following methods. On the one hand the advertising cost should be compared with the quantity of visitors and buyers. On the other hand they can be converted into the costs per “click”. For example, we paid $ 100 for advertisement, got 20 clicks, of which only five were buyers. Marketing ratio would be 5.

Correlation to Lifetime Duration

The lower value of CAC compared to LTD, then more money the company spends to cover the additional costs or profits. The ratio of CAC to LTD - this is a good measure for evaluating the effectiveness of your business and the market in general. Let's look at two ways that you could get a ratio of 2.5:

Measure Jan Feb Mar Apr May
Costs Spend $5,000 $5,000 $5,000 $5,000 $5,000
Visits 1,000 1,000 1,000 1,000 1,000
Conversion Rate 0.50% 1.00% 1.50% 2.00% 2.50%
New Subscribers 5 10 15 20 25
CAC $1,000 $ 500 $333 $250 $200
LTV $500 $500 $500 $500 $500
Multiple 0.5 1.00 1.50 2.00 2.50
Costs Spend $5,000 $5,000 $5,000 $5,000 $5,000
Visits 1,000 1,000 1,000 1,000 1,000
Conversion Rate 1.00% 1.00% 1.00% 1.00% 1.00%
New Subscribers 10 10 10 10 10
CAC $500 $ 500 $500 $500 $500
LTV $250 $500 $750 $1000 $1,250
Multiple 0.5 1.00 1.50 2.00 2.50

(Table 1: example the ratio of CAC to LTV)

Conclusion

Surprisingly, many firms do not know their cost of acquiring a new customer. Partly, this is because many firms do not track it and partly because some of the costs are difficult to allocate. However, while it is difficult, the firm could begin to analyze different types of advertising for customer acquisition or to hold the old one. The CAC is the critical metric to e-commerce business. Today, the tone of the conversation has changed from customer acquisition to retention. This requires a different mindset and a 3different and new set of tools. A good thought experiment for an executive audience is to ask them how much they spend and/or focus on acquisition versus retention activities. While it is difficult to perfectly distinguish the two activities from each other, the answer is usually that acquisition dominates retention.4)

1)
“SAGE: Dictionary of Marketing Communications: Norman A. P. Govoni: 9780761927716.” SAGE., 35.p. Web. 12 Dec. 2012.
2)
Blattberg, Robert C., Pyŏng-do Kim, and Scott A. Neslin. Database marketing: Analyzing and managing customers. New York: Springer, 2008. 497-98.
3) , 4)
Russell S. Winer. “Customer Relationship Management: A Framework, Research Directions, and the Future.” Http://groups.haas.berkeley.edu/fcsuit/pdf-papers/crm%20paper.pdf., Apr. 2001. Web. 12 Dec. 2012.
  • Bookmark "Acquisition costs" at del.icio.us
  • Bookmark "Acquisition costs" at Digg
  • Bookmark "Acquisition costs" at Furl
  • Bookmark "Acquisition costs" at Reddit
  • Bookmark "Acquisition costs" at Ask
  • Bookmark "Acquisition costs" at Google
  • Bookmark "Acquisition costs" at Netscape
  • Bookmark "Acquisition costs" at StumbleUpon
  • Bookmark "Acquisition costs" at Technorati
  • Bookmark "Acquisition costs" at Live Bookmarks
  • Bookmark "Acquisition costs" at Yahoo! Myweb
  • Bookmark "Acquisition costs" at Facebook
  • Bookmark "Acquisition costs" at Newsvine
  • Bookmark "Acquisition costs" at Yahoo! Bookmarks
  • Bookmark "Acquisition costs" at Twitter
  • Bookmark "Acquisition costs" at myAOL
  • Bookmark "Acquisition costs" at Slashdot
  • Bookmark "Acquisition costs" at Mister Wong
crm/metrics/acquisition_cost.txt · Last modified: 2012/12/13 00:00 (external edit)