Customer Acquisition Costs
Overview
Customer acquisition costs are costs incurred by a firm when trying to acquire new customers. Typically this includes
new sales and marketing campaigns, such as advertisements. Firms can grow customers through word of mouth from current customers,
however, this process is slow and of limited reach.
Measuring
Measuring customer acquisition costs is probably as much art as it is science. A simple brute force way to measure CAC is the following:
{% (marketing + sales \, expense)/(number \, new \, customers) %}
where the relevant numbers are assessed over a given time frame.
This type of simple analysis can give a good ballbark figure, but it ignores the fact that a firm may gain new customers
from word of mouth or other means that do no incur costs. That is, the number of new customers will probably not be zero, even
if the firm is not spending significantly on sales or marketing that period.
One way to disentangle these issues is to estimage the number of new customers using a linear relationship:
{% y = \alpha + \beta \times spend %}
where
- {% y %} - number of new customers
- {% \alpha %} - number of new customers in periods with no spend
- {% \beta %} - the rate at which new spend brings in new customers.
If a company has multiple data points (with different spend amounts) available, the relevant quantities can be estimated
using
ols regression.
Marketing Campaigns
Marketing campaigns
are focused sets of marketing acitivities designed to promote the company or a specific product
and can require a decent spend. As such, the cost of any campaign to acquire customers must be included in
customer acquisition cost.
