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### Understanding Customer Acquisition Cost

Estimating what you can expect to earn from each customer is only one piece of the puzzle. Attracting those customers and providing the product likely won’t be easy, and it will cost money.

As we discussed earlier, you need to understand all three of these components of the profit formula to ensure the viability of your idea:

1. The price you charge to your customers

2. The cost of providing your product/service

3. The cost of acquiring your customers

The first item is something you should be able to justify based on a clear understanding of the value your product provides for your target customer. If you are still unclear on this, consider visiting Activity 6 "Price Your Product".

It can be difficult to come up with a good estimate of the variable costs of providing your solution to a single customer (item number two). Whether you are manufacturing a product or delivering a service, your initial costs will likely fall as you learn how to increase the efficiency and effectiveness of providing your solution to customers.

The most challenging estimate to come up with will be your Customer Acquisition Cost, or CAC (item number three). Note that this will include most of your Go-to-Market expenses incurred up until the point of purchase. There are many different channels for customer acquisition—paid search, social media advertising, freemium, mobile, telesales, inside sales, etc. The cost of acquisition depends on factors like the suitability of the medium to the product, the presence of your target segment on the medium, the cost associated with exposing the audience to your message, and the effectiveness of the message within the medium.

You want to spend as much as you can afford to acquire a new customer without exceeding that amount. If you spend too much, you are losing money. If you don’t spend enough, you lost out on potential customers and revenue. How do you know what the magic number is?

To calculate your Customer Acquisition Cost, consider your Go-to-Market System. What are the costs associated with bringing your product to market? You may not have enough information to answer this question, so check out the examples below and consider if one of the approaches is similar to yours.

Example 1: inside Sales

CAC = \$1000+

It its early days (circa 2006, long before its multi-billion acquisition by SAP), Qualtrics employed a phone-based customer acquisition process. Inside sales reps, so called because they reached out to potential customers from their desks (rather than traveling around the country to meet them). Reps sold the Qualtrics Research Suite, a flexible platform for survey creation and analysis, to companies and research groups within companies. Qualtrics, based in Provo UT, hired inside reps to fit the following profile: smart (average GPA of 3.7 out of 4.0), able to manage multiple roles at once (most reps had worked while they were in school), college athletes, and had lived outside Utah for at least two years (these were often Mormons who had served as missionaries). These reps were paid a relatively low base salary (about \$2,000 per month), but earned commissions on every sale. As a result, the most successful reps were able to earn upwards of \$100,000 annually. The firm also incurred some overhead in training and supporting these reps. If a productive rep was able to close ten new customer deals per month, the CAC comes out to about \$1,250 per customer.

Example 2 : Digital Advertising and paid Social Media

CAC = \$25 - \$100

Example 3: Freemium

CAC = \$1 - \$50