How to calculate the cost of your market expansion: Customer Acquisition Costs

 

How to calculate the cost of your market expansion: Customer Acquisition Costs Valithea AdvisoryOnce you have set a target number of customers to reach, how do you reach these customers? Now that you have projected your customer base, you can calculate your marketing and sales costs and split these costs into the different channels that you are using. By doing so, you can validate every channel and see if you can realistically win that certain number of customers with your marketing strategy. This is also useful for the internal day-to day company management, financial planning and to measure marketing effectiveness.

For a more simple exercise, it’s possible to research, in a few cases, the Customer Acquisition Costs of larger competitors that have recently got stock-listed, by measuring marketing costs vs the number of new customers acquired during that period of time: this would provide you with the minimum CAC to use, as larger companies are likely to be much more efficient in their marketing activities than a young company. By doing some research online, it’s possible sometimes to find a few general industry values, but it’s generally important to know that B2C CAC is lower, let’s say around $10, while for B2B this can be much higher, let’s say $150. The values depend on the specific sector and company.

At the company’s inception these costs are likely higher, and they will fall over time as more organic growth can be achieved. Also, if you initially take up marketing activities yourself, by assigning a value to your time, you can measure your effectiveness in engaging customers.

Your marketing and sales strategy can include a variety of methods and channels. It’s possible to establish how many customers in percentage can be earned through each channel. These can include: social media, Adwords, media advertising, traditional advertising, referrals, direct sales, sales partners, trade fairs, shops, and others. For example, you can project a sales or marketing funnel with costs, audience target, leads, conversion and customers won over time. The conversion rate will likely grow slightly over time. For sales funnels, you can then establish, based on capacity, how much sales personnel you need  in order to achieve your targets. This generates the expenses for each channel used, as well as the total marketing and sales costs.

In advanced financial plans, you can also include the cost to retain current customers: this could be the cost of branding and regular marketing activities and materials.

Calculating your Customer Acquisition Costs (CAC) should also be at the basis of the company’s financial management. For a healthy business, it’s usually recommended that LTV (Customer Lifetime Value) is at least 3 times the CAC, and that in any case, in the long-term revenue per customer is clearly in excess of the Customer Acquisition Cost.

To measure how healthy and realistic your business and revenue model is, you can input all these values into excel while carrying out the validation of your business model, before proceeding to the company’s financial projections.

Whichever type of expansion you choose, sales and marketing costs can grow in line with your expansion.